It is widely known that banks owned by the government have the worst asset quality. What is less well known is that some of the biggest defaulters to these banks are either public sector companies or firms with deep links to politicians. This is not to ignore the fact that some of the biggest oligopolies in India have also taken on too much debt, but to argue that the problem of crony socialism is as acute in India as the problem of crony capitalism.
Indian banks have been misused in two ways by successive governments. First, they are used as a captive buyer of bonds used to finance the fiscal deficit. Second, their lending decisions are often based on political direction from New Delhi. These two problems cannot be cracked unless there are financial sector reforms. Managerial autonomy through the Banks Board Bureau is a good first step. But the eventual goal should be either the privatization of public sector banks or the rapid entry of new private sector banks.