I left New York for Mumbai on the evening of Jan. 21, 2017. As I sat at Newark Airport awaiting to board a United Airlines flight, I couldn’t help reflect on the fact that the Indian banking sector was sitting on one of the highest non-performing loans to assets ratio among the G20 countries and even among the group of emerging markets—a marked departure since its standing in 2009.
The poor capitalisation of Indian banks from an economic standpoint had been evident in the stock market data at least since 2013. Indian public sector banks stood out as having particularly weak balance sheets in terms of their ability to withstand further stress, as captured by the New York University Stern School of Business Systemic Risk (SRISK) rankings.
It was thus obvious to most that financial stability of the banking sector and economic growth in India were at risk. Ambiguity about the exact impact that demonetization undertaken in November 2016 would have on the real economy and the financial sector had only aggravated these concerns.
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