The Strategist

The Government of India gives a 15-day ultimatum to local banks

02/28/2018 - 10:58

Blossoming bank frauds in India led the government into despair. Perhaps this is why the country set an unreachable goal of clearing the state financial system in just fifteen days.

On February 27, the secretary of the financial support department Rajeev Kumar wrote on Twitter that banks experiencing one crisis after another are given two weeks to improve their operations and management.

Bad management and a weak system led to an increase in fraudulent transactions and a bunch of "bad" debts that threaten to destabilize the Indian banking system. However, it takes some time to solve this crisis.

"It took about fifty-sixty years to establish some of these systems, and trying to undertake the necessary reorganization in fifteen days is a very, very bold task. Everything becomes even more complicated given the realities of India, where the financial system is quite diverse and depends on the geography, the size of the branches, the type of customers, etc. Therefore, it is extremely difficult for banks to assess the effectiveness of their methods of risk management, "said Ashvin Parekh, managing partner of Ashvin Parekh Advisory.

Over the February, several governmental creditors warned holders of shares of massive fraud, including the Punjabi National Bank (almost $ 2 billion withdrawn), Bank of Baroda (37 billion rupees) and Oriental Bank of Commerce (109 billion rupees).

State creditors account for more than 70% of the banking industry in India and, undoubtedly, need a major repair. However, 15 days is a too short period of time.

In India there are 21 banks in which the government owns a controlling interest, and more than half of them are in a depressing situation. The volume of "bad" loans of all Indian banks rose to Rb. 9 trillion, and most of them are owned by public sector lenders. As bankers focus on reducing this amount of debt, business has reached a dead end. In addition, there are fears that such frauds may appear in other banks.

The cumulative loss of 19 of the 21 banks in the public sector amounted to 164.33 billion rupees in the period from October to December 2017. This was before the Reserve Bank of India (RBI) tightened standards, accelerating recognition of problem loans and not allowing managers to hide the situation. This step is likely to lead to a surge in reports of "bad" loans in the coming days, speeding up the cleaning process.