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Arun Jaitley, who has been asking PSU banks to lend more, should know that bad loans usually pile up at the end of a credit bubble
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Arun Jaitley seems committed to the grand tradition of Indian finance ministers telling bankers to lend more. His predecessor often did the same. Jaitley has also been speaking about the problem of bad loans that state-owned banks are battling.
He should know the two are related: bad loans usually pile up at the end of a credit bubble.
In India, bank credit grew at least 10 percentage points faster than the underlying economy in nominal terms during the boom years. Credit standards were lowered. Bankers recount stories about the metaphorical phone call from New Delhi in those years. Ordinary citizens may remember the cold calls through the day with offers for personal loans.
China plays the game with more sophistication. First, it forces banks to lend aggressively. It then pours in massive amounts of capital to clean up bank books. Needless to add, the Indian government just does not have the money for such recapitalization.
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