Recent comments from former Reserve Bank of India (RBI) governor Raghuram Rajan mirror our longheld view that the key to reviving the ailing domestic banking sector is for the government to infuse capital on a large scale, and offset the cost by partially privatising the sector. But the likelihood of these measures being implemented unfortunately remains slim.
India’s banking sector problems are well documented. Non-performing loans rose to almost 8% of total loans in 2016. Restructured loans account for a further 8%. These ratios are very high by emerging market standards. This has led to concerns about the ability of a number of banks to meet global capital requirements, and has made them reluctant to lend. Lending growth to the private sector has slumped to its lowest rate in over a decade.
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