Watch India’s Financial System for Bigger Problems

March 9, 2020 (EIRNS)—Significant stress in India’s financial system of banks and shadow banks is going to continue. Bloomberg News reported March 7, “India’s attempt to buttress its financial system by taking control of the country’s fourth-largest private lender has instead triggered widespread confusion and signs of investor panic, adding a fresh layer of risk to an economy that’s already headed for its weakest expansion in more than a decade.” There are depositor runs on Yes Bank’s branches because the nationalization does not expressly guarantee deposits. There are also investor runs on Yes Bank’s bonds—not surprising in itself, but the runs have spread to the bonds of other, smaller banks and shadow banks. And this occurs as India’s banking authorities are also trying to consolidate 29 smaller shadow banks, in various stages of trouble, into 12 larger financial institutions. This may now fail, causing some of those institutions to fail. The Yes Bank failure has also caused the collapse of a payments system which it ran jointly with Walmart India.

There has been very little growth in bank lending during the past several years and a corresponding lack of business capital investment. India’s economy has slowed down dramatically as a result of this and the lack of stepped-up government investment in infrastructure for manufacturing or agriculture.

Therefore, the pileup of non-performing loans in the banking system has been going on for more than two years, exacerbated by the failure of the big infrastructure-PPP lender IL&FS (Infrastructure Leasing & Financial Services Ltd.) in 2018.

Severe problems of shadow banks and their counterparties are now infecting commercial banks; India needs a bank separation law immediately.