A liquidity crisis in the making?
The state of the Indian economy is fragile: formal employment growth is slow or stagnant, the current-account deficit is rising, and capital flows are volatile. Producers and consumers are confronting a grave liquidity shortage, and, with banks struggling to manage their growing portfolios of non-performing assets:
These problems have been building for more than 15 years, since successive governments began forcing state-run commercial banks to engage in long-term lending that should have been the preserve of development banks (which were eliminated during India’s economic liberalization). Other sorts of crony lending were also encouraged, reflected in the fact that fewer than 5,000 large borrowers accounted for 90% of total non-preforming assets – and more than half of all Indian bank loans – at the end of March. The recent bankruptcy of the major shadow lender IL&FS has exacerbated the credit squeeze.
Who Should Control India’s Central Bank?
By: Jayati Ghosh – Jawaharlal Nehru University
Why is Modi attacking the Reserve Bank?
The government is particularly unhappy with RBI measures to clean up India’s banks, many of which are burdened by a large volume of non-performing assets, and prevent risks from building up in other parts of the financial system. These measures are squeezing state-owned banks’ ability to lend to politically connected clients.
India’s Central Bank under attack
By: Eswar Prasad – Cornell University
Conclusion?
After a meeting on November 19th between the government and the central bank, for the first time, the RBI has been forced to acknowledge that the government has a say in what it does with its reserves. The bank has had to back down, not the government.
By: Bloomberg
