Is Indian Banking System On The Verge Of Collapse?

Source: India Today

 

With the recent outbreak of COVID-19(the scientific name for coronavirus), the global financial market has become so treacherous that people are now fearing a strong exacerbation of the economic slowdown which was slowly picking up before this epidemic.

China, being the world’s second-largest economy is yet to execute a recovery plan after huge production losses due to coronavirus, whereas the US, Japan, and some of the European countries are facing economic recessional symptoms.

However, the Indian economy has been witnessing the effects of this global slowdown in a cocktail with the prolonged ripple effects of demonetization, IL&FS crisis, rising bad loans and so on.

Source: The Economic Times

While India has already been witnessing a staggeringly low rate of growth of 5% in the previous year with the high unemployment rate, something else just happened which not only created a state of distrust but has also suggested the advent of a dark period with difficult challenges. 

The crisis at Yes Bank is producing echoes of a possible economic collapse, given the panic. The Reserve Bank of India, after taking over the wheel of Yes Bank management drew a lot of attention from the shareholders, as well as the financial market, with the sudden capping of cash withdrawal limit to Rs. 50,000, eroding trust in the minds of the depositors.

This all started with the deteriorating quality of its assets as well as the accumulation of NPA – Non-Performing Assets (consider this as the money stuck for the lender after non-payment of the installment of the principal amount or the interest rate). Due to this, the bank was in the immediate need of capital which remained inadequately addressed.

Now, RBI has imposed a moratorium on Yes Bank till 31st March 2020, after which these ‘stressed assets’ will have to be categorized as Non-Performing Assets as well. This whole situation is like a ticking time-bomb, ready to explode with its shockwaves covering a major part of the Indian Economy as a cascading effect.

The stock market has already borne some of its consequences with Sensex dropping as much as 3.8% on March 6, 2020, set for its biggest fall in 5 years. Now, there is an inevitable question- how did such a significant bank in such a dire situation did not get all the help it needed?

Source: India Today

Lately, people can be seen rushing to the ATMs of Yes Bank standing in the queues, waiting for their turn to avoid possible losses by withdrawing cash as much as they can. This picture resembles a lot with the public anxiety during demonetization when people could be seen standing in the long queues of the ATMs in a similar fashion.

A similar kind of downward trajectory could be witnessed in the case of PMC bank, which was brought down by bank management’s involvement in the fraud in September 2019, but unlike in the case of Yes Bank in which RBI announced its merger with SBI for 49% stake, PMC bank is still waiting for a revival plan. Moreover, the finance minister Nirmala Sitharaman has announced that people can expect the Yes Bank’s restructuring plan to be effective by April 3.

Source: DNA India

To cut the long story short, we are in the unchartered territory now. There are multiple menaces like the spread of coronavirus as well as the fall of the banking system hitting the economy at the same time and its immunity is contextually questionable.

The stock market is becoming more and more volatile in response to these shockwaves and pessimism is in the air. The current government needs to buckle up for answering some really tough questions, and the public needs to be prepared for the worst.

 

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