New Delhi (India), June 15: The stability of economies across the world saw wide-ranging volatility throughout the previous decade of the 2010s. Branching off from the above turbulent times, the banking sector in India had found itself in precarious times since the mid-2010s which sparked and motivated a cleaning-up process. “You need to clean up, get the banking system, get the financial system going again if you want stronger growth,” were the words of Mr. Raghuram Rajan in 2019. He served as the RBI governor from September 2013 – September 2016. During his time in office, the central bank instructed distressed Indian lenders to rectify their financial records, which involved identifying non-performing assets.
India encountered its banking challenges prior to the global financial crisis in 2007 and 2008, as described by Rajan. During that time, numerous investments were made, leading to a significant accumulation of bad loans that required resolution in order to stimulate lending. Banks serve as the primary source of funding for Indian companies. Rajan, the former RBI governor, acknowledged the alternative viewpoint of those questioning the need for a cleanup, stating that continuation without addressing the issue was simply unfeasible. The accumulation of non-performing assets had caused banks to restrict lending due to the congestion in their balance sheets. In 2015, Raghuram Rajan initiated the Asset Quality Review (AQR) as part of the efforts to cleanse bank balance sheets. The cleanup process gained further momentum under the leadership of Urjit Patel.
“The Indian banking sector cannot afford to execute poor corporate governance anymore. It needs to strengthen with competency and outstanding ethics. The government must make auditors and rating agencies accountable by implementing heavy penalties for errors,” says Kishore Subramanian, a leading voice in finance. The recent 7.2% growth of India’s GDP is a positive indicator that the clean-up of India’s banking sector is going in the right direction.
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