Back in the Red

THE deterioration in the performance of scheduled commercial banks in 1995-96 and the fears that the situation may worsen in the current year must surprise those who had taken the authorities' claim that the process of cleaning up the banks' balance sheets had been completed by 1994-95 itself. To any objective observer, however, it was clear that the way the government had gone about the task was replete with problems and was not sustainable in the medium term. Broadly, the approach has been that the financial system exists for its own sake and the objective of rebuilding the balance sheets of banks and financial institutions had to be pursued irrespective of the costs this imposed on the government budget and the real sectors of the economy. In consequence, the economy has had the worst of both the worlds: the working of the financial intermediaries has been such as to hinder the growth process and the financial institutions themselves have been hard put to it to come out of the red.