India’s Banking Crises: A Comprehensive Overview

India, with its diverse economy and population of over 1.33 billion people, is grappling with a series of banking crises that have severely impacted its financial sector and broader economy. This article delves into the root causes of these crises, the responsibility of various stakeholders, and the broader implications for economic stability.

The Economic Landscape of India

India's economy is predominantly cash-based, with a significant portion of it involving black money. A considerable fraction of small businesses are run by petty traders, housewives, and small-scale enterprises. These businesses often rely on cash transactions, making them vulnerable to economic disruptions. The introduction of demonetization in 2016 significantly disrupted these activities, leading to the closure of many small factories and businesses.

Impact of Demonetization and GST

Demonetization closed down many unregistered businesses, especially those heavily reliant on cash transactions. Small factories and enterprises were forced to shut down due to a lack of cash for payroll. The Krala economy, which heavily depends on labor from other states, faced a severe liquidity crisis when laborers were not paid, causing them to leave.

The Goods and Services Tax (GST) introduced in 2017 added to the economic stress. While it aimed to simplify the tax structure, it led to a shock in the market. Many businesses had to pay advance payments that were not returned, leading to a net liquidity drain in the system. The 28% GST, the highest in the world, further eroded the financial stability of many economic actors, forcing them to pay substantial taxes on essential inputs.

Corporate Governance and Banking Crises

The root causes of these banking crises can be traced back to a lack of good corporate governance practices. Corporate governance has become a major issue in India, and it is almost impossible to attribute blame to any single group or institution. The responsibility lies with the government (both state and central), regulators like the Reserve Bank of India (RBI), the political class, the bureaucracy, the management of banks, and statutory auditors.

Public sector banks, private sector banks, and cooperative banks are all involved in various corrupt practices. Checks and balances put in place to regulate the banking sector have faltered. The Finance Ministry, the RBI, the State Cooperative Department, bank management, and auditors have failed in their duties, making them susceptible to political and business pressures.

The Role of Financial Institutions and the Economy

A healthy financial sector is crucial for economic development. In India, various financial institutions like NBFCS, commercial banks, specialized lending agencies, and even the government depend on each other for credit requirements. The mutual dependence of these institutions is key to the success of the financial sector and the country's overall development.

The country's economic growth picked up well after 1991, with some cyclical reverses and threats like the 2007-2008 global financial crisis. In 2012-2013, the global recession worsened the situation, and the demonetization in 2016 added a significant blow to the economy. The demonetization was a self-inflicted crisis, and the government's failure to address its impact further exacerbated the financial sector's crisis.

While the exact set of events led to PMC Bank's crisis remains unclear, the broader context of India's banking sector woes is evident. The government's failure to mitigate the economic and financial sector crisis following demonetization highlights the need for more robust regulatory and governance mechanisms.

Conclusion

The banking crises in India, exemplified by the recent crises of PMBank, YesBank, and PNB, are a result of systemic issues and a lack of effective corporate governance. To address these challenges, there is a need for greater accountability, stronger regulatory frameworks, and a more transparent financial system. Addressing these issues could help restore stability and growth to India's economy.