Failure Of Banking System May Adversely Impact The Economy


New Delhi: India’s banking system that has been experiencing scams, bad debts, ATM cash shortages in the recent months and the bad run is starting to have repercussions for both the broader economy and Prime Minister NarendraModi.
India’s nearly $1.7 trillion formal banking sector is coping with $210 billion of soured or problem loans, and some regional banks have been ensnared in fraud scandals. With a national election slated for April or May, Goldman Sachs Group economists have trimmed their growth projections for the year ending March to 7.6% from 8% amid concerns that the banking system’s woes are more widespread than previously thought.
On top of that, ATMs in some parts of the country have been reported to be running dry in recent days. There’s an unusually high demand for cash, according to the Finance Ministry. The rupee shortage is being blamed on everything from farm spending to looming elections and hoarding by some families.

Yet some roots of the issue may lie in Modi’s 2016 decision to take high-denominated cash out of circulation in a bid to curtail India’s vast and unreported black economy and crack down on illicit financial transactions.
The move initially caused economic mayhem and the disruptive shocks to cash in circulation continue to linger. While government officials have said the banking system is healthy and that there’s adequate cash for the excess demand, the crunch has only further tarnished the public image of banks.
“The problems in India’s banking system are self-inflicted mostly because of lack of due diligence,” said N.R. Bhanumurthy, a Delhi-based economist at the National Institute of Public Finance & Policy. “Of course this will affect growth.”
The broad uncertainty hovering over the financial sector comes just as the economy was showing early signs of recovering from a disruptive tax system overhaul and the 2016 cash ban. Now there are growing worries that lending, and with it economic activity, will stall.


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