The current financial crisis is different from 2008, economy is entangled with internal problems more than external reasons

The economy was at a high level during 2007 to 2012, at the same time most loans were given, which could be the reason for bad loans

YES Bank’s crisis with IL&FS, DHFL and other banks increased challenges for Reserve Bank

India’s $ 1.7 trillion economy has been doing worst for the last few years. Around three major finance companies have been seized by the investigating agencies and the central bank during this period. Also, the central bank had to assure people that their money was safe thrice in the last two years. According to reports, India’s current financial crisis is quite different from the financial crisis of 2008. In 2008, where American finance companies got into trouble and the problem arose, this time the problem has started from within the country to a large extent. The government has many challenges – the biggest challenge is to increase growth, along with the problem of bad loans remains a major problem before the government. In such a situation, should the government rob the applause of the economy or should it work towards ending the world’s worst bad loan ratio?

The major reason for the decrease in economic growth
The Indian economy was at its highest level during the years 2007 to 2012, at the same time, the highest number of loans were given, which led to bad loans. During this period, 400% more loans were given by the bank. The downturn in the economy began when many companies struggled to repay debt. This prevented banks from paying more interest. This led to lack of money in the market for business. It is for these reasons that the economy of India slowed down. Infrastructure Leasing and Financial Services Limited (IL&FS) was India’s first non-banking company in the year 2018, which reached the verge of sinking due to non-payment of debt and the government had to intervene. It is considered to be a 2008 Lehman-like event.

What has happened since the sinking of IL&FS?
Lack of credit was the reason for IL&FS’s debt sinking. After this, the Dewan Housing Finance Group (DHFL) also got into a similar crisis. Reserve Bank of India also had to take control of DHFL . Similarly, some small lending companies also drowned in 2019 and their investigations have been handed over to central agencies. Also, the Reserve Bank has taken control of them. In 2020, Yes Bank was on the verge of closure due to liquidity problem. After this the central bank had stopped the withdrawal of funds from Yes Bank and after the government’s intervention many banks and financial institutions under the leadership of SBI had to come forward for Yes Bank’s rescue.

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What happened to Yes Bank?
The bank expanded rapidly under the leadership of Rana Kapoor, the former chief executive officer and co-founder of Yes Bank. In March 2018, the last year of his tenure, Yes Bank became one of the highest lending banks in the country. Credit Suisse said in the 2019 report that the company gave the maximum loan to those businessmen who were already in debt.

What are the authorities doing to solve the problem?
With the increase in bad loans, the economy is expected to grow losses. After this, RBI started process in 2015 to know the status of bad loans, which revealed the full nature of the problem. Non-performing assets in the banking sector grew 3% to over 9%. Subsequently, the government brought in a new bankruptcy law for the recovery of bad loans. In spite of all this, the economy declined, so the authorities took steps to take fresh loans and show more leniency towards some borrowers and small businesses. The Reserve Bank of India reported last year that NPAs have declined. Apart from this, steps are being taken for recovery from the defaulters of IL&FS and Yes Bank.

Will such problems arise in the bad loan and finance sector even in the future?
Global ratings agency S&P has warned that the side effects of Yes Bank’s bailout package could be dangerous. Under the RBI, a plan is proposed to issue hybrid bonds to some investors in a rescue plan. Fitch Ratings says India’s domestic retail loan market may face a crisis of confidence. The close proximity between Yes Bank and other banks, mutual funds and insurers, the country’s fourth largest private lender, adds to the risk in the finance sector. India’s slow economy is further threatened by the coronavirus epidemic.

RBL deposit reduced
Private lender RBL Bank said on Thursday that it has lost about 3 per cent of its total deposits in the last one week, instead of withdrawing money from government institutions and institutional investors. However, this does not affect retail depositors much. The total deposits of the bank as on 31 December was around Rs 62,907 crore. It has a current and saving account of Rs 16,855 crore.

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