ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Spectre of Debt

Public banks must develop mechanisms for better governance and improved lending strategies.

Financial liberalisation has done two things to the lending strategies of public sector banks (PSBs). One, it increased the share of retail credit assets in total assets such as credit card advances, housing and personal loans; in short, it financed borrowed consumption expenditure. The other, financing infrastructure through government-enforced pressure on public banks. The reason for the latter was twofold: an inadequate corporate bond market and the unwillingness of private players to deploy their own capital for long-term financing of infrastructural projects; and the government’s reluctance to invest in infrastructure given its fiscal commitments. The result was reliance on public–private partnerships for financing infrastructure projects.

The boom of 2004–08 was largely driven by private investments in infrastructure that led to an acceleration in India’s gross domestic product (GDP) growth rate. The burden of financing these projects fell on the PSBs. These banks are now facing the downside of loan exposures, with alarming ratios of non-performing assets (NPAs) as a proportion of total advances.

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