Banks - The Barometers of the Economy

The banking sector is generally an excellent barometer of economic health. If the economy is doing well, bank credit volumes will rise and there will be fewer bad loans. Economic stress will show up quickly in the form of loans going bad and recession will lead to a falling credit volume. The Indian banking system has seen stress over the past few years. There has been a slowdown. In addition, many infrastructure projects with massive debt exposures have stalled. Plus, high inflation has meant high interest rates, driving up borrowing costs for banks and reducing the demand for credit. As a result, credit growth has dropped to the lowest level in 15 years. There have been a record number of requests to restructure stressed loans and also a record amount of loans going sour. According to various assessments, close to ₹7,00,000 crore is stuck in stalled infrastructure projects alone. Around 12 per cent of all assets held by the banking sector have gone bad, or 'sticky', and these could still be rising. Cleaning up balance sheets is now a high priority and banks also have to recapitalise. There are global norms for prudential lending and capitalisation and it is important that Indian banks meet these, given the increasing importance of trade in India's GDP. The latest prudential limits (so-called Basel III norms) have been raised, and assuming minimal credit growth rates of 10 per cent or so, Indian banks need over ₹2,50,000 crore in fresh equity. That requirement will also grow if credit gro

This article was originally published on June 12, 2015.