How RBI saved India from a Banking Crisis? : Economic Case Study

Summary

The video script discusses the resilience of the Indian banking system amidst global financial turmoil in 2023. It delves into the past banking crisis in India, triggered by the 2008 global recession, and the subsequent rise in non-performing assets (NPAs). The script highlights the measures taken by the Reserve Bank of India, including capital infusion, bank mergers, the PCA framework, and the implementation of Basel III norms, which strengthened the banks and avoided a crisis during the pandemic. It also mentions the Indian bankruptcy code as a revolutionary policy that saved banks from significant losses.

Takeaways

• 🌟 In 2023, while numerous banks worldwide faced crises, not a single Indian bank failed, demonstrating the resilience of India's banking sector.
• 🏦 The abrupt closures of Silicon Valley Bank and Signature Bank in the US raised concerns about the stability of the US banking system, contrasting with India's banking sector's strength.
• 📈 State Bank of India's growth of 20% and the overall profitability of India's banking sector in 2023 highlight the sector's robustness.
• 📉 Historically, Indian banks faced crises post-2008, with non-performing assets (NPAs) rising sharply from less than 5% to 15% within three years.
• 🏛️ The Reserve Bank of India (RBI) played a pivotal role in turning around the banking sector through strategic measures post-2018.
• 💡 The RBI's implementation of the PCA framework and the Basel III accord strengthened the banking system's safety and stability.
• 💼 The Indian government's capital infusion into public sector banks, amounting to $38 billion from 2015 to 2019, helped to bolster their financial health.
• 🔄 Mergers of weaker public sector banks with stronger ones streamlined the sector, enhancing operational efficiency and reducing expenses.
• 📉 The asset quality review conducted by RBI Governor Dr. Rajan exposed hidden NPAs, leading to a spike in NPA ratios and prompting corrective actions.
• 📚 The Indian bankruptcy code, introduced in 2016, has been instrumental in resolving the NPA crisis and saving banks from significant losses.

Q & A

Why did no Indian banks fail in 2023 despite global banking crises?

In 2023, Indian banks were resilient due to strong loan growth, higher yields, and lower credit costs, which made it the most profitable year for India's banking sector.

What are the recent closures of Silicon Valley Bank and Signature Bank, and why are they significant?

The abrupt closures of Silicon Valley Bank and Signature Bank in a matter of days have sent shock waves across the economy and raised concerns about the US banking system.

What is a non-performing asset (NPA) in the context of banking?

A non-performing asset (NPA) refers to a loan given by a bank that is not being repaid as per the agreed terms, indicating a high risk of default.

How did the Indian banking system handle the aftermath of the 2008 financial crisis?

After the 2008 crisis, the Indian banking system faced a crisis with high NPAs, which was addressed by the Reserve Bank of India through various measures including the asset quality review and the implementation of the PCA framework.

What was the impact of the asset quality forbearance rule introduced by the RBI in 2008?

The asset quality forbearance rule allowed banks to avoid classifying bad loans as substandard, which led to a lack of reserve set-aside and contributed to the rise in NPAs.

How did the Indian government and RBI address the high NPAs in public sector banks?

The government and RBI addressed high NPAs by infusing capital into banks, merging weak banks with stronger ones, implementing the PCA framework, and enforcing stricter regulatory measures.

What is the PCA framework and how does it help in monitoring banks' financial health?

The PCA framework, or Prompt Corrective Action framework, sets guidelines based on a bank's financial health indicators such as capital ratio, asset quality, profitability, and leverage, allowing the RBI to take immediate action if a bank crosses any threshold.

What is the significance of the Basel III framework in the Indian banking system?

The Basel III framework is a set of international rules that dictate the level of capital banks must hold to ensure their safety. In India, the RBI has implemented Basel III with even stricter requirements than the international standard, providing an extra layer of safety for Indian banks.

How did the Indian Bankruptcy Code of 2016 help in resolving the NPA crisis?

The Indian Bankruptcy Code of 2016 provided a legal framework for resolving insolvencies and bankruptcies, which helped banks recover dues and reduce their losses, thus aiding in the resolution of the NPA crisis.

What role did Dr. Raghuram Rajan play in addressing the NPA issue in India?

Dr. Raghuram Rajan, as the former Governor of the RBI, conducted the asset quality review that revealed the hidden NPAs in Indian banks, leading to a series of reforms and measures to address the issue.

How did the global economic crisis affect Indian banks, and how did they manage to stay robust?

Despite the global economic crisis, Indian banks remained robust due to strategic reforms, strict regulatory measures, and the implementation of frameworks like PCA and Basel III, which ensured their stability and resilience.

Outlines

00:00

🏦 Resilience of Indian Banks Amidst Global Banking Crisis

The paragraph discusses the contrasting performance of Indian banks in 2023 with the global banking sector. While banks worldwide were failing, Indian banks not only survived but also experienced significant growth. The script highlights the challenges faced by Silicon Valley Bank and Signature Bank in the US, which led to economic concerns. It contrasts this with the strength and robustness of the Indian banking system, which saw its most profitable year in 2023. The paragraph also touches upon the historical vulnerability of Indian banks, particularly after the 2008 financial crisis, and the steps taken by the Reserve Bank of India to ensure the stability and growth of the sector.

05:02

📊 The Evolution of Indian Banking: From Crisis to Resilience

This paragraph delves into the historical context of Indian banking, particularly the period following the 2008 financial crisis. It describes how Indian banks, once fragile and prone to failure, have become robust and resilient. The script mentions the Punjab National Bank crisis as a turning point that brought the banking issues to light. It also discusses the measures taken by the Ministry of Finance and the Reserve Bank of India to address and rectify the banking sector's weaknesses. The paragraph sets the stage for an in-depth analysis of how Indian banks managed to avoid a crisis amidst global economic turmoil.

10:03

📉 The Impact of Asset Quality Forbearance on Indian Banking

The paragraph examines the role of asset quality forbearance in the Indian banking sector, explaining how this rule allowed banks to avoid classifying loans as non-performing assets (NPAs), thus hiding the true extent of bad loans. It details the aggressive lending practices of Indian banks prior to the 2008 crisis and the subsequent rise in NPAs from 2015 to 2018. The script also discusses the impact of hidden NPAs on the banking system and the measures taken by Dr. Raghuram Rajan, the then Governor of the Reserve Bank of India, to address the issue, including the implementation of the asset quality review that revealed the actual scale of NPAs.

15:03

🛡️ Strategic Measures to Strengthen Indian Banking

This paragraph outlines the strategic measures implemented by the Indian government and the Reserve Bank of India to strengthen the banking sector and avoid a crisis. It discusses the significant capital infusion into public sector banks, the merger of weak banks with stronger ones to improve efficiency, and the introduction of the PCA framework for monitoring bank health. Additionally, the paragraph highlights the implementation of the Basel III framework to ensure banks have adequate safety measures in place and the creation of the Indian bankruptcy code to address insolvency and bankruptcy issues, which collectively contributed to the stability and strength of Indian banks in the face of global economic challenges.

📚 Conclusion and Call to Action

The final paragraph wraps up the video script by summarizing the key points discussed and emphasizing the importance of the Reserve Bank of India's strategic framework in safeguarding the Indian banking sector. It invites viewers to access study materials for a deeper understanding of the concepts covered and encourages them to subscribe to the channel for more informative content. The paragraph concludes with a reminder of the value gained from the case study and a prompt for viewers to engage with the content by liking the video.

Keywords

💡Non-Performing Assets (NPAs)

Non-Performing Assets (NPAs) refer to loans or advances for which the installments or interest payments have been overdue for a period of 90 days or more. In the video, it's mentioned that high NPAs indicate that banks are not doing well financially. The script discusses how NPAs rose dramatically from 2015 to 2018, reaching 15%, which was a significant factor in the banking crisis in India.

💡Asset Quality Review

Asset Quality Review is a process undertaken by banks to assess the actual financial health of their assets, particularly loans. The video highlights that when the Reserve Bank of India (RBI) conducted an Asset Quality Review, it revealed hidden NPAs, which were a major issue in the Indian banking system.

💡Forbearance Rule

The Forbearance Rule allowed banks to avoid classifying bad loans as substandard, thus not requiring them to set aside reserves for potential losses. The script explains how this rule contributed to the accumulation of NPAs, as banks continued to lend without proper risk assessment.

💡Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is the central banking institution of India, which controls the monetary policy of the Indian rupee. The video discusses how the RBI took several measures, such as the Asset Quality Review and the introduction of the PCA framework, to strengthen the banking system and address the NPA crisis.

💡Public Sector Banks

Public Sector Banks are banks in which the majority of the stake is owned by the government. The script indicates that these banks were particularly affected by the rise in NPAs, leading to a banking crisis in India.

💡PCA Framework

The PCA Framework, or Prompt Corrective Action framework, is a set of guidelines set by the RBI to monitor the financial health of banks based on various indicators. The video explains that this framework was implemented to take immediate action if a bank's financial health deteriorates, thus preventing bank failures.

💡Banking Crisis

A banking crisis occurs when a significant number of banks face financial difficulties, often leading to bank failures. The video's main theme revolves around the Indian banking crisis, particularly how it was caused by high NPAs and how measures were taken to recover from it.

💡Merger of Banks

The script mentions the merger of weak public sector banks with stronger ones as a strategy to consolidate resources, improve efficiency, and reduce expenses. This was part of the government's efforts to strengthen the banking system.

💡Basel III Framework

Basel III is a set of international banking regulations that set higher global minimum standards of bank capital to improve financial stability. The video explains that India's implementation of Basel III provided an additional layer of safety for banks, helping them withstand global financial crises.

💡Indian Bankruptcy Code

The Indian Bankruptcy Code is a legal framework for insolvency and bankruptcy in India. Although not detailed in the script, it is mentioned as a revolutionary policy designed to help the banking sector deal with the NPA crisis and save banks from significant losses.

💡Economic Warfare

Economic warfare refers to the use of economic means to weaken another country. The script briefly mentions the Russia-Ukraine conflict and its impact on the global economy, highlighting the resilience of Indian banks even during such crises.

Highlights

In 2023, while banks globally were failing, not a single Indian bank failed or faced a crisis, and Indian banks were growing at a significant rate.

Silicon Valley Bank and Signature Bank's abrupt closures raised concerns about the US banking system.

State Bank of India gained 20% from its low, and the Indian banking system was resilient with strong loan growth, higher yields, and lower credit costs.

2023 was the most profitable year for India's banking sector despite global economic challenges.

Indian banks were not always robust; they faced a crisis after the 2008 financial crisis and various scams.

The Punjab National Bank crisis in 2018 brought the banking issues to light.

The Reserve Bank of India took important steps to address and avoid banking crises.

Major countries like the UK and Japan are in recession, and tech giants in the US have laid off thousands of employees.

The World Economic Forum estimates that AI will cause job losses for more than 85 million people by 2025.

Growth School offers a free workshop on AI and tools like Chat GPT to help people embrace AI instead of fearing it.

The concept of non-performing assets (NPAs) is crucial in banking; high NPAs indicate banks are not doing well.

In 1992, public sector banks in India had NPAs as high as 25%, which reduced to less than 5% by 2008 but rose again post-crisis.

Aggressive lending by Indian banks for infrastructure projects led to a flood of money in the market from 2003 to 2008.

The RBI's asset quality review revealed hidden NPAs, which spiked from 5% in 2015 to 15% in 2018.

The Indian government and banks infused 3.19 trillion rupees into the banks from 2015 to 2019 to strengthen them financially.

The merging of weak public sector banks with stronger ones and the introduction of the PCA framework helped improve the banking system's health.

The implementation of the Basel III framework provided an additional layer of safety for Indian banks.

The Indian bankruptcy code, introduced in 2016, helped save banks from massive losses and played a crucial role in the sector's recovery.

Transcripts

hi everybody did you ever notice that in

2023 while Banks all across the world

were failing not a single Indian Bank

failed or faced a crisis in fact our

banks were growing at a staggering rate

during the exact same time I want to

briefly speak about what's happening in

Silicon Valley Bank and Signature Bank

the abrupt closures of three banks in a

matter of days that are now sending

shock waves across sectors of the

economy and raising concerns about the

US banking system State Bank of India

has gained 20% from its low Indian

banking system is quite resilient strong

loan growth higher yields and lower

credit cost insur that fi23 was the most

profitable year for India's banking

sector but you know what Indian Banks

were not always so robust and you would

be shocked to know that there was a time

when Indian banks used to fail like a

house of cards in fact after the 2008

crisis along with all the scams that

were happening India was also witnessing

a banking crisis and all of this came to

surface in 2018 with the Punjab National

Bank

crisis Punjab National

Bank steps are being taken to this the

ministry has taken note of this and

certain steps are being taken and this

is why ladies and gentlemen a very very

important chapter of the Indian economy

was written by The Reserve Bank of India

so the question is suddenly from 2018 to

2024 how did we go from facing a banking

crisis to becoming an expert in avoiding

a banking crisis while so many banks all

across the world were failing how did

Indian Banks stand strong even during

the pandemic and the global economic

crisis and most importantly what on

Earth did The Reserve Bank of India do

to protect your

money but before we move on I want to

quickly thank our partners of today's

episode and that is growth school people

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now for this economic case study we are

using the reference of these amazing

research papers from the columb

University and the center for social and

economic progress CH let's start from

the basics in the banking space there is

an important term called the

nonperforming asset in simple words if a

bank gives out 10 CR rupees in loans and

understands that 2 CR worth of loans

will never be repaid this 2 CR Rupees is

considered to be a non-performing asset

in percentage 2 out of 10 CR rupees as

in 20% of the loans are non-performing

assets so if the NPS are high it means

that the banks are not not doing well

now if you look at this graph in 1992

the situation of our public sector Banks

was so terrible that the non-performing

assets as in bad loans were as high as

25% but by 2008 it reduced to less than

5% but just like we see in this graph

after the 2008 crisis the npas slowly

started Rising again and suddenly from

2015 to 2018 that is in just 3 years The

NPS shot up from less than 5% to touch

15% in 2018 so the question is what

exactly happened after 2008 and did it

happen only because of the 2008 crisis

well as it turns out because nobody

expected the 2008 recession to happen

before 2008 the public sector Banks went

super bullish on lending for

infrastructure and other

[Music]

projects and if you look at our economy

from 1991 to 200000 we saw a staggering

growth look at this graph from 1980 to

1990 our GDP per capita grew by just 27%

similarly from 1990 to 2000 it shot up

by 16% but from 2 to 2010 it shot up by

67.2% so in 2008 if you were a banker

you would expect the boom to continue

right well this is exactly what the

bankers of India thought and they

started lending very very aggressively

in fact according to the Center for

social and economic progress a promoter

confessed that he was pursued by the

banks with waving check FS asking him to

just name the amount that he wanted from

the banks and if you look at this chart

the banks were lending so fast that the

total Bank Credit in the market short

off from 7.5 trillion in 2002 to 15

trillion in 2005 to 33 trillion in

2009 and the annual expansion of credit

accelerated from 15.2% in 2002 to

31.4% in 2005 so in short the market was

flooded with money from 2003 to 2008 and

this is why ladies and gentlemen

something crazy happened now before we

move to the next segment you need to

know how the banks under the RBI

categorize their loans so let's dive

into it you see the RBI instructs Banks

to sort their loans into standard and

non-performing groups Standard Loans are

essentially the safe bets where there is

a very slim chance that the borrower

will default on the flip side

non-performing loans are those loans

where the borrower is struggling to meet

interest or principal payments so in

short these loans are at a risk of

default now these non-performing loans

get further broken down into

subcategories and these subcategories

are substandard where a borrower has

defaulted for less than 12 months

doubtful when the loan has not been paid

back for more than a year and the

recovery is expected to happen at a loss

and loss loans where the bank expects to

incur a loss for sure if you've

understood this let's come back to what

happened after 2008 in August 2008 which

is just 1 month before the stock market

crash of 2008 the result Reserve Bank of

India introduced a rule called asset

quality forbearance and as usual this

might sound like a boring banking term

but let's make it super simple for you

and understand this using a story let's

say think private limited starts missing

loan payments and doesn't pay the Ami

for 90 days so according to the rules

the loan is classified as a

non-performing asset now usually the RBI

says that every time someone defaults

the banks have to keep aside a certain

amount of money that they cannot lend or

use it for money making purposes in this

case for Simplicity purpose let's assume

that the RBI stated that 15% of the

outstanding loan amount of your NPA must

be kept aside so after a year of

repayment if things school private

limited has an outstanding loan of 8

lakh rupees and then it defaults

according to the regulation 15% of 8

lakh rupes needs to be kept aside by the

bank so 1.2 lakh rupes needs to be kept

aside in the Bank Reserves and This 1.2

lakh rupees cannot be used for Lending

or other other income generating

activities this is how RBI makes sure

that the banks set aside a certain

amount of money so that they do not go

bankrupt themselves and this is where

the forbearance rule came in because of

this rule Banks did not have to classify

bad loans as substandard loans at all

and since they did not have to classify

it as substandard loans they did not

have to keep aside This 1.2 lak rupees

in reserves so even when people were

defaulting the banks could give out more

loans to business is this is a reason

why the loans that should have been

marked as high risk were labeled as

restructured as a result the banks kept

on lending and they got into even deeper

trouble this practice of forbearance

continued for 10 long years this is how

the bad loans started to become the

silent killers of the Indian banking

system by the way during this time that

is between 2008 to 2012 we also saw the

scams in India which caused massive

losses to the Indian

economy

the CBI today filed a new first

information report in yet another scam

in the Commonwealth game Saga CBI has

filed an firir against former Anar

executive director and directors ofas

multimedia The adash Fallout it's been 3

months since a scam broke a building men

for defense personnel crabbed by

politicians and bureaucrats this is when

Dr Rajun became the governor of India

and when he reviewed the hidden npas of

the Indian Banks he found something

absolutely shocking he saw that even

though the npas in the public sector

Banks were Rising they were completely

hidden in plain sight and when the asset

quality review was actually conducted

the npas in India started spiking from

5% in 2015 to almost 10% in 2016 to 15%

in

2018 this is how our public sector Banks

ended up being in one of the worst

states in the decade in fact Dr Rajun

even said that too many loans were made

to well-connected promoters who have had

a history of defaulting on their loans

former RBI Governor raguram Rajan said a

large number of bad loans can be traced

to the 2006 to the 2008 period

government has been putting the burden

on the RBI the government has been

acting on its own Banks didn't have

enough power to get promoters to pay or

to put the stress assets back on track

they didn't have the right kinds of

tools too much lending to the bad

projects that need to be shut down and

too little lending to viable projects

that need to be supported so you can

imagine how big the problem was so in

short if you were to analyze this

situation from a macro perspective many

loans were given when economy performed

well then when they turned into bad

loans they were hidden due to asset

forbearance Rule and very soon the NPA

started rising to scary levels this is

how slowly and steadily India was

inching towards a banking

crisis so the burning question over here

is what did the RBI do to save India

from a banking crisis now this is where

you will see the beauty of economics and

the difficulty of running a country as

massive as India in fact you will know

why is the RBI Governor deserving of a

400 CR house to State anyways let's get

back to help the public sector Banks get

stronger financially the Indian

government and the banks together added

a huge amount of money to their funds

from 2015 to 2019 in total they added a

staggering 3.19 trillion rupees which is

$38 billion and in 2018 alone close to

2.11 trillion rupees was put into these

Banks this is how the banks started to

have real cash to sustain their

existence the second thing that the

government did was to merge the weak

public sector banks with stronger Banks

this is the reason why the number of

public sector Banks reduced from 27 in

2017 to just 12 Banks after the merger

this way the banks could pull their

resources operate with better efficiency

and they're able to reduce their

expenses and lastly the Indian

government introduced something called

the PCA framework or prompt corrective

action framework this framework sets

guidelines based on the bank's Financial

health indicators and this includes

Capital ratio asset quality

profitability and leverage so now if any

Bank crosses any threshold the RBI will

immediately take very strict action to

prevent your bank from failing this is

how the RBI monitors every important

Bank in the country so that India does

not face a financial crisis and lastly

India implemented something called the

basil 3 framework and this execution

took six long years from 2013 to 2019

for those who don't know basil 3 is a

set of international rules that tells a

bank how strong and high their safety

walls need to be it's almost like

international fire regulation but for

banks and this is where we get into

hardcore banking Concepts so if you are

interested in understanding these

Concepts I let attach a document in the

study material so that you can read

through it and understand this concept

better but long story short what you

need to understand is that the RBI has a

double lay protection for your banks for

example if basil 3 says Banks need to

have 9% of the total risky loans in

their reserves RBI says that Indian

Banks need to have

11.5% so that our banks can stay extra

safe and the fun fact is that the banks

that failed in America did not have a

basil 3 framework executed so because we

took the pain of implementing it for six

long years in 2022 when all other Banks

were failing our banks did not face a

crisis and lastly India designed a

revolutionary policy called the Indian

bankruptcy code in 2016 the Union Cab

has amended the insolvency and

bankruptcy code by the ordinance route

the Supreme Court has upheld the

insolvency code in entirety the

government is looking to amend the IBC

the bankruptcy act it came at a time

when the Indian banking sector was

struggling dealing with an NPA crisis

the government dues could be low in the

waterfall because whatever you give to

the government you take from the banks

and this policy alone has saved our

banks lacks of crores in losses now I've

already seen your comments in the white

paper video and because of popular

demand we are making a separate video on

the Indian bankruptcy code so let's skip

it for this time and then we'll cover it

in depth in the next episode so this is

how ladies and Gentlemen The Reserve

Bank of India first faced a banking

crisis learned lessons from the crisis

and designed a super safe super

strategic framework for our banks such

that even while the banks all across the

world were failing Indian Banks stood

tall even during the pandemic even

during the global economic crisis caused

due to the Russia Europe economic

Warfare and while listening to the story

you just learned about one of the most

important chapters of the economy of

India and I just hope you learned

something valuable from this case study

that's all from my side for today guys

please find all the study materials in

the description if you learned something

please make sure to hit the like button

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to our Channel thank you so much for

watching I will see you in the next one

[Music]

[Music]

bye-bye