A fresh capital crisis looms over India’s banking sector4 min read 27 Oct 2020, 09:47 PM IST
Another pile-up of bad loans could wipe out the capital of banks and call for bailouts with taxpayer money
The overhang of bad loans in the Indian banking sector has been a major factor behind the economic slowdown in the country. The problem pre-dates the covid crisis. During a downswing in the business cycle, several bank loans turn sour, leading to increased bankruptcies . Bad loans, however, tend to decline with rising incomes during upswings. Regulators expect banks to set aside the minimum mandated capital to provision for bad loans under the Basel norms. These norms have been strengthened further under the new Basel 3 framework in the wake of the global financial crisis of 2008-09. They have been made dynamic and aligned to the business cycle. The Reserve Bank of India (RBI) expects Indian banks to maintain a capital to risk-weighted asset ratio (CRAR) of 9%.