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

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A Banker's Account

No Regrets by D N Ghosh; New Delhi: Rupa Publications, 2015; pp xi + 375, ₹695 (hardcover).

Concentration, Collusion and Corruption in India’s Banks

Why would companies, for whom costs rise with higher interest rates, choose to amass credit as interest rates rise? Were more and more loans taken with the understanding that default would be inevitable? Only a commission of inquiry with a specifi c mandate to understand the years of loose lending by banks in India can answer these and other uncomfortable questions. These answers are needed in the interest of securing our economy, and indeed our democracy.

Not in People's Interest

The politics and economics of interest rate formation in this country must be studied carefully. Lowering the interest rate raises stock prices in an environment where they themselves cannot move up thanks to the fundamentals of the economy that are not conducive.

‘On-tap’ Bank Licences

Critically evaluating the draft guidelines for “on-tap” bank licences put up by the Reserve Bank of India, it is argued that India’s banking system is already sufficiently competitive, and there appear to be few who would be willing to enter the banking business. Entry of newer players, especially those with corporate backing, cannot be the priority at the moment. The priority over the next two or three years has to be the resolution of the non-performing assets problem and strengthening of the existing players.

Financial Sector Reforms

Unified Financial Code: Is India Ready? A Critique on the Financial Sector Legislative Reforms Commission Report by S S Tarapore; Gurgaon: LexisNexis, 2015; pp xii+166, ₹295.

Do Foreign Banks in India Indulge in 'Cream Skimming'?

Foreign banks in developing countries are often found to indulge in "cream skimming," a lending strategy that targets only wealthy segments of the credit market and excludes small and marginal borrowers from the general pool of borrowers. This paper attempts to investigate whether lending patterns of foreign banks in urban regions of Indian states are indicative of such practices. Using credit data on urban regions of 21 states of India for 1999-2011, this paper finds empirical evidence of cream skimming by foreign banks in India.

Procyclical Credit Growth and Bank NPAs in India

Despite recent monetary policy accommodation, bank credit growth continues to decelerate in India, partly due to huge non-performing asset overhangs in banks. This paper explores various issues related to surging NPAs in banks and observes that excessive credit growth in the past is a major reason that has led to current NPAs. Other factors such as contemporary economic conditions, capital adequacy and overall levels of efficiency of the banks have also affected the incidence of NPAs. For promoting financial stability and enhancing monetary policy effectiveness, it is suggested that macro-prudential aspects such as counter-cyclical capital buffer and dynamic provisioning need to be strengthened. There is also a need to explore if corporate governance concerns could be instrumental in adversely impacting the loan book of state-owned banks.

Capital Account Management in India

India has been subject to capricious capital flows since its integration with the global capital markets in the early 1990s. In a bid to balance diverse objectives, India, like many other emerging markets, has resorted to active management of various types of capital flows. This paper finds that while the calibrated liberalisation approach resulted in altering the composition of capital flows towards more stable flows, and has helped India to negotiate the "Trilemma," the use of sporadic capital account management measures in the face of surge or stop of capital flows has not been very effective in achieving their objectives of reducing external vulnerability or mitigating macro-prudential risks.

Calm before the Storm?

It is generally believed that India is doing far better than most emerging market economies in these times of global economic turmoil. Emerging markets are facing capital flight, with large-scale outflows, especially since the second half of 2015, with the trend expected to continue in 2016. India has been less affected than others, but is clearly vulnerable due to the large number of Indian firms that are exposed to external borrowings, a weak rupee, a year or more of declining merchandise exports, falling corporate profitability, and stressed corporate balance sheets.

Financial Reforms in an Endogenous Money Economy

An examination of the Reserve Bank of India's monetary policy leaves little doubt that India can be suitably characterised as an endogenous money economy. In an endogenous money environment, financial reforms will prove ineffective in stimulating credit supply to large commercial borrowers. They may, however, prove counterproductive by sharpening the credit constraints faced by agricultural and other petty producers in the economy.

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