Chaos in Indian Financial System

India’s alarming financial crunch may have a severe impact on the developmental projects in J&K in the near future

Srinagar, Publish Date: Nov 20 2018 11:48PM | Updated Date: Nov 21 2018 2:33AM
Chaos in Indian Financial SystemRepresentational pic

The mega project of J&K i.e. Zojila Tunnel project may have to go (as reports suggest). The debt ridden IL&FSL (Infrastructure Leasing and Financial Services Limited) bagged the project of Zojila Tunnel which is the Asia’s one of the longest bi-directional tunnel connecting Sonamarg with Gumri in district Kargil. This project was inaugurated by the Prime Minister Narendra Modi last year. This 14.15 Km tunnel has a strategic and socio-economic importance for the Ladakh region. It is believed to reduce the time duration of traveling from 4 hours to just 15 minutes. But the officials from the company have denied such kind of effects and have stated that this project has nothing to do with the liquidity of situation of the company. This is the only second project after Channani-Nashri project in Jammu and Kashmir taken by Infrastructural Financial Company. When we ponder subtly upon the crush, it is basically being created due financial crunch in the Indian Banks like IL&FSL which laid quite a bad impact on the financial position of the country. However, bringing stability and converting deficit financial condition into surplus one isn’t a task Herculean. The matter demands to be inspected meticulously before it becomes a problem too grave.

The financial position of the Indian financial market is worsening as the companies are facing liquidity problems. The deficit of some major companies has widened to about 1.4 lakh crore in just the last week of October. As huge deficits has put great pressure on the monetary authority to increase monetary growth to finance the deficit, the RBI has already purchased bonds through the open market operation from the financial market in the early October in order to inject the money in the system but nothing happened and the situation is still becoming grave day by day as financial position is alarming gravely. On the other hand Indian rupee is consistently slowing down against the US Dollar as it has crossed rupee 73 per dollar during mid October of the current financial year. In order to bring stability of the Indian rupee against the US Dollar, the government had taken steps to increase the taxes on imports of about 19 items. So that foreign exchange may be maintained because the foreign exchange reserves have declined by more than 100 billion by late September of this financial year. This step may also prove healthy for improving the current account deficit, and ultimately may prove improvement in the nation's balance of payment.

The financial crunch in the system has created a panic among big firms since the bankruptcy of the Infrastructure Leasing and Financial Services Limited (IL&FS) which is a big infrastructural investment company.

Further more the non performing assets or NPA of some major banks and other small banks is already on an increasing trend. They are not in a position to increase their profit percentage compared to the corresponding quarter of the last financial year. The CAG (Comptroller and Auditor) of India has also raised the questions on the role of regulatory authority of money market i.e. RBI regarding the present financial instability of the banks and their mounting deficits and rising NPAs. On the other hand top officials of the Reserve Bank of India are raising questions and are expressing their apprehensions regarding the autonomy of the central bank. 

The government has also prepared a ground for merging of 3 public sector banks/ three state-run banks that is Dena Bank, Vijaya Bank and Bank of Baroda to create the third-largest bank in the country to improve the banking system as the country’s banking sector is already facing a  non-performing assets or NPAs of about Rs 8.99 lakh crore.

The process of amalgamation is expected to be completed by the end of this financial year. Till then these banks will continue to function independently.

According to the Chief Executive Officer of the Deena Bank, its NPA will reduce after merging with other two banks. The questions arise that if the NPA of one bank decreases due to merging with other two banks then will it be fruitful for those two banks. Will not its NPA affect their performance?

Besides this, RBI also wants to ease the Prompt Corrective Action (PCA) Framework for the banks which are suffering from Losses. The PCA framework shows regulatory   on three parameters: capital adequacy ratio, non-performing assets and return on assets. 

At present their  are 11 banks under PCA framework, making losses and government expects them to come out of the framework at their own as they face restrictions on lending and business expansion. These banks account for over Rs 3 lakh crore of the total Rs 8.4 lakh crore bad loans whereas RBI data on gross bank credit till August-end this year shows that the credit to industry has grown by a margin of 1.9%, credit to micro and small enterprises has increased 2.6 and medium enterprises by 6.5% and credit to the service sector has recorded 26.7% growth whereas MSME (Micro Small and Medium Enterprises) sector improved about 6% of the gross bank credit.

(Syed Mudasir is pursuing Post Graduation, Department of Economics, University of Kashmir)

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