Weak banks have been the epicentre of many a financial crisis—from Japan in 1989 to East Asia in 1997 to the US in 2007. India’s tightly regulated banks have failed to provide modern financial services to millions of Indians, but they have also avoided the sort of irresponsible lending that has wrecked entire economies in recent years.
That does not mean that all is well with Indian banks. Credit rating agency Crisil has said in a report released on Thursday that the gross bad debt of Indian banks is expected to treble over the next two years. This increase will be led by bad loans made to companies, rather than to consumers and homebuyers.
Should we worry? The spike in bad loans is not good news. But a systemic crisis is most unlikely. Here, we agree with the recent assessment by a committee headed by Reserve Bank of India deputy governor Rakesh Mohan—our financial system is stable and has adequate capital.
Yet, let us now recognize that a local credit bubble has burst and that corporate fundamentals will deteriorate in the coming years.