Tag: Indian banks

Why have Indian banks become financially fragile?

It is not the question of banks behaving one way or the other within a neoliberal capitalist economy that is of significance; the point at issue is the neoliberal capitalist economy itself.

By Prabhat Patnaik

NEW DELHI, 13 Mar 2020: The crisis at Yes Bank is only the concentrated expression of a deeper malaise afflicting the Indian banking system as a whole, namely its vastly increased financial fragility. The chief economic advisor is no doubt right when he assures depositors, through the media, that the Indian banking system is quite stable; but this still does not negate the fact that it has become more fragile. Congress is no doubt right in claiming that the crisis of Yes Bank is because of a phenomenally rapid increase in its loans over the last five years, from Rs 55,633 crore in 2014 to Rs 2,41,499 crore in March 2019, and in particular over the two-year stretch, March 2016 (when it was Rs 98,210 crore) to March 2018 (when it became Rs 2,03,534 crore). And there is also no doubt that this loan spree is associated with “crony capitalism”, i.e., among the prominent beneficiaries of such loans are the prime minister’s “crony capitalists”.

But while all this is true, remaining confined only to this level of analysis is not enough, because it obscures a deeper problem relating to the very nature of a neoliberal economy, namely that such an economy necessarily and inevitably makes the financial system more fragile by increasing over time the riskiness associated with the portfolios of financial institutions. In fact, the only way that a boom can be sustained in such an economy is through the adoption of measures that make the financial system fragile. So when the question is asked: what was the Reserve Bank doing when Yes Bank was on its loan-giving spree, the answer is not that it was just sleeping, but rather that it was turning a blind eye to this spree—as was every other watch-dog in the economy—in a bid to keep the growth rate up.

A major hallmark of a neoliberal economy is that fiscal policy cannot be used to usher in or sustain a boom. This is because such an economy, under pressure from globally-mobile finance capital, is forced to keep its fiscal deficit in check as a percentage of GDP. Indeed, most neoliberal economies, including India, have legislation on their statute books that put a ceiling on their fiscal deficit at 3% of GDP. Of course, even if the fiscal deficit is not widened, a boom can still be sustained by shoring up aggregate demand, and as it begins to flag, by increasing government expenditure, and financing it by taxing capitalists (who save a large proportion of their incomes unlike the workers who spend most of it). But this again is anathema for finance capital and hence ruled out. Fiscal policy in a neoliberal economy, therefore, becomes “pro-cyclical” rather than “anti-cyclical”. This is in the sense that when the economy is on a downward slide, fiscal policy, far from reversing such a slide, contributes further towards it. The crisis at Yes Bank is only the concentrated expression of a deeper malaise afflicting the Indian banking system as a whole, namely its vastly increased financial fragility. The chief economic advisor is no doubt right when he assures depositors, through the media, that the Indian banking system is quite stable; but this still does not negate the fact that it has become more fragile. Congress is no doubt right in claiming that the crisis of Yes Bank is because of a phenomenally rapid increase in its loans over the last five years, from Rs 55,633 crore in 2014 to Rs 2,41,499 crore in March 2019, and in particular over the two-year stretch, March 2016 (when it was Rs 98,210 crore) to March 2018 (when it became Rs 2,03,534 crore). And there is also no doubt that this loan spree is associated with “crony capitalism”, i.e., among the prominent beneficiaries of such loans are the prime minister’s “crony capitalists”.

But while all this is true, remaining confined only to this level of analysis is not enough, because it obscures a deeper problem relating to the very nature of a neoliberal economy, namely that such an economy necessarily and inevitably makes the financial system more fragile by increasing over time the riskiness associated with the portfolios of financial institutions. In fact, the only way that a boom can be sustained in such an economy is through the adoption of measures that make the financial system fragile. So when the question is asked: what was the Reserve Bank doing when Yes Bank was on its loan-giving spree, the answer is not that it was just sleeping, but rather that it was turning a blind eye to this spree—as was every other watch-dog in the economy—in a bid to keep the growth rate up.

A major hallmark of a neoliberal economy is that fiscal policy cannot be used to usher in or sustain a boom. This is because such an economy, under pressure from globally-mobile finance capital, is forced to keep its fiscal deficit in check as a percentage of GDP. Indeed, most neoliberal economies, including India, have legislations on their statute books that put a ceiling on their fiscal deficit at 3% of GDP. Of course, even if the fiscal deficit is not widened, a boom can still be sustained by shoring up aggregate demand, and as it begins to flag, by increasing government expenditure, and financing it by taxing capitalists (who save a large proportion of their incomes unlike the workers who spend most of it). But this again is anathema for finance capital and hence ruled out. Fiscal policy in a neoliberal economy, therefore, becomes “pro-cyclical” rather than “anti-cyclical”. This is in the sense that when the economy is on a downward slide, fiscal policy, far from reversing such a slide, contributes further towards it.

Source: NewsClick