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• W239501523 abstract "Indian banks urgently need capital. To make sure that they get it, the government must ease up on regulation and welcome foreign investment. India's banking system is creaking. If the country doesn't find the capital to revive its weak public-sector banks and to address the mounting problem of nonperforming loans, its banking system will founder, with devastating consequences for the broader economy. The government must thus undertake to reform and consolidate the sector while encouraging strong local institutions and foreign investors to increase their presence in India. To fend off insolvency, Indian banks will need to find fresh capital of $9 billion to $15 billion--representing 2 to 4 percent of the country's gross domestic product and 50 to 90 percent of the current capital of Indian banks--during the next five years, which is roughly how long it will take to reform the system. Up to 60 percent of this sum will be required to write off irrecoverable loans, 18 percent to finance productivity improvements, and the rest to support growth (Exhibit 1, on the next page). Some 35 domestic banking institutions, accounting for about 40 percent of the sector's assets, are particularly fragile because of the poor quality of their assets. It is from these troubled banks that the vulnerability of India's banking system largely arises. In addition, the recent crisis caused by weak investment-management processes at the Unit Trust of India (a state-owned institution with $12 billion of assets under management) threatens to suck $1 billion or so of liquidity from the banking system in or der to fund redemption pressure. A further $500 million to $1 billion of capital could be needed to ensure Unit Trust's solvency. The dimensions of such a recapitalization are by no means huge compared with the needs of Indonesia, Malaysia, and South Korea when financial crisis struck them in 1997; each required capital of 10 to 15 percent of its GDP. But the challenge is enough to force a resource-strapped Indian government to set about strengthening the sector and encouraging structural change. India's credit risk problem is actually worse than it seems, because it has been disguised by accounting norms less stringent than those of developed economies and by the tendency of banks to roll over past-due loans. Nonperforming loans are reported to be 8 percent of the loans of banking institutions, but international equity analysts and credit-rating agencies say that the real figure is more likely to be 12 to 13 percent. This level of nonperforming loans is close to those of Malaysia (13 percent) and South Korea (11 percent) when the Asian crisis erupted in 1997. Furthermore, government-directed lending obligations in India are higher than those in many Asian economies, and this increases the burden of nonperforming loans because so much of the lending has ended up in poorly managed companies. Foreclosure and bankruptcy laws are weak and have failed to provide an effective framework for the speedy recovery of bad loans. The need to improve productivity through investments in technology accounts for one-third of the capital requirements of Indian banks. Most of them--public and private alike--suffer from low productivity, measured by the number of transactions relating to deposit and loan accounts per hour for each employee. Public-sector banks currently function at 20 percent of the productivity level of the best Indian bank and at 10 percent of the productivity of US banks. Recapitalization won't be easy. As the largest shareholder in the banking system, owning almost half of India's banks, the government has in the past recapitalized financial institutions to the tune of about $5.5 billion. But its need to control the fiscal deficit--already 6.1 percent of GDP in 2000 and 11.4 percent including the deficits of India's states--will prevent it from allocating extra capital to meet future requirements. …" @default.
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• W239501523 date "2001-09-22" @default.
• W239501523 modified "2023-09-24" @default.
• W239501523 title "Revitalizing India's Banks" @default.
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