India’s financial system has been a mess for a while. There have been multiple quick fixes and recapitalization of fragile public sector banks, but problems persist. An important underlying cause is that the dominant part of India’s financial sector, public sector banks, makes commercial decisions based on political signalling. What’s good for the bank’s commercial interest may not necessarily be in sync with the goals of the political executive.
In the years after the global financial crisis, there were credible accusations that many loans to big businesses were rolled over on account of the influence of the finance ministry in the decision making process. Perhaps some bankers would, in normal circumstances, have been more prudent in funding infrastructure projects. The outcome was a large bad loan problem.
The conditions under which commercial decisions are made in public sector banks do not seem to have changed even now. To illustrate, finance secretary Rajeev Kumar this week said that in the nine-day loan melas organized by banks this month, Rs 81,780 crore were disbursed. This loan mela is reminiscent of similar efforts in the 1980s when the political executive felt that bankers were not doing enough to disburse small ticket loans. Juxtapose the recent loan melas with similar efforts in the last five years where banks were under political pressure to meet loan disbursement targets for different groups and we have an unchanged decision making environment for public sector banks.
Till such time as banks are insulated from the political executive’s agenda, the Indian financial system will lurch from crisis to another.