A banking crisis might be looming over India

Among all the economic crisis, a banking crisis is one of the most difficult ones to foresee and that is what might be looming over India.

On 17th of April this year, the Reserve Bank of India (RBI) issued a notice saying, “It has been reported in a section of the media that there is shortage of currency in certain parts of the country. It is clarified at the outset that there is sufficient cash in the RBI vaults and currency chests. Nevertheless, printing of the notes has been ramped up in all the 4 note presses. The shortage may be felt in some pockets largely due to logistical issues of replenishing ATMs frequently and the recalibration of ATMs being still underway.”

While ATMs running dry alone is hardly an indicator of a looming banking crisis, but one must note that weeks after this RBI notice, the ATMs are still running dry; check out this Time of India story, published 9 days after the RBI notice, https://timesofindia.indiatimes.com/city/hyderabad/despite-efforts-few-atms-have-no-cash/articleshow/63922161.cms Alarm bells only rang this month when cash dispensers began running dry in several states, including Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar.

One has to take note that this ATM crisis comes at a time, when Indian banks should be flushed with cash thanks to Bhartiya Janata Party (BJP) led government’s crackdown on illegal currency activities by banning INR 500 and INR 1000 rupee notes in Q4 2015, that forced Indians to put back the money in banks or other relevant financial institutions operating in India, such as the Post office.

One must also take note that this ATM crisis comes at a time when arrays bank frauds are being revealed in several state-owned banks. The notorious example is the state-owned Punjab National Bank (PNB), which is the second largest public sector bank India. The news rocked the Indian banking industry when on valentine day of this year a $1.8 billion fraud at PNB came to highlight. Here is a Times of India article, explain the fraud, https://timesofindia.indiatimes.com/business/india-business/pnb-fraud-all-that-has-happened-so-far/articleshow/62945221.cms The amount has grown since and crossed $2 billion marks. Since the PNB crisis, several other frauds came to highlight. In the latest turn of event, The Central Bureau of Investigation has booked 15 former and serving senior IDBI Bank officials and 24 others, including Aircel founder C. Sivasankaran, 11 companies and their directors for allegedly cheating the bank to the tune of ₹6 billion. In most cases, all of these fraudsters have left India and still enjoying lavish life by staying out of the reach of Indian law enforcement.

One must also take note that thanks to years of corruption (involving politicians in cases) and reckless lending practices, the non-performing assets (NPA) at several state-owned banks remain high and that is excluding these fraudsters. According to government’s own admission, the NPA of all banks in the country amounts to INR 8, 40,958 crores ($129 billion approx.), which is equivalent to almost 6 percent of the country’s GDP and more than 30 percent of the country’s forex Reserves.

The story doesn’t end here. One must take a look the banks’ performance over the last few years; here are some of the banks’ performance,

• Allahabad bank (net profit negative for 2016 and 2017; started bleeding cash since 2017)
• Andhra Bank ( negative quarterly profits since September 2017; has been bleeding cash since 2011)
• Bank of Baroda (negative profit and cash flows in 2016; 2017 better thanks to government’s money injection but still weak)
• Bank of India (Negative profits for past two years; negative cash flow last year)
• Bank of Maharashtra (Negative profit last year; expected to remain in red this year)
• Canara bank (negative annual profit in 2016; recovered in 2017 but still weak)
• Central Bank of India (negative profit in past two years, more bleeding expected this year)
• Corporation Bank (regular annual negative profit since 2014, more bleeding expected this year)
• Punjab National Bank (negative annual profit in 2016; recovered in 2017 but weak)
• State bank of India (smallest profit ever last year; quarterly profits negative)

India is faced with this situation in its banking sector at a time when loan growth has reportedly slowed and interest rates are to pick up globally. While it is not certain that the country will be hit by a major banking crisis but the risks of such an occurrence seem to be quite high.