Banks incapable to lend : PM’s Modi demonetisation led to this financial crisis

Prime Minister Narendra Modi’s demonetisation has done an irreparable damage to the country’s economy that public sector banks are in dire need of a bailout as in future banks won’t be able to provide loans to any Indian person or even businessman while BJP government’s intention of recapitalizing the banks through RBI has legal hassles by hampering it to perform its bounden functions.

Prime Minister Narendra Modi’s worst historic disaster of demonetisation has brought the country to the brink of bankruptcy  and financial crisis at this juncture when the entire world is struggling to prevent the break out of the World War III.

The thrusting demonetisation without doing the necessary homework has let to losses in the public sector banks  and now the government is faced with the problem of cash infusion in the banks from the foreign exchange of the country. The foreign exchange is actually meant to provide import cover and  macro-economic stability to the country. Thus, Public sector banks  will become incapable of lending loans to the common man and businesses due to their severe capital crunch in the banks.  The credit growth of all banks slowed down to 8.1 per cent in 2016-17 from 10.9 per cent in the previous year. Therefore, Credit growth in the banking system has hit a multi-year low of 6.8 per cent in the fortnight ended September 15, 2017.

Further more in times of contingencies like war the Modi government  will have to mortgage its sovereignty or Gold to meet the situation.

Discussions between the Central Bank and the finance ministry to help fund bank cash infusion  has revealed a serious state of country’s finances. It is being contemplated that a mechanism for capital infusion should be in-conformity with fiscal responsibility regulations. The government is now faced with a situation that even a portion of foreign exchange could be used for capitalizing banks without adversely affecting the country’s import cover and macro- economic stability. The forex reserves comprise foreign currency assets of 377.751 billion dollars, gold of $20.69 billion special drawing rights of $7.51billion and reserve tranche position of $2.29 billion with the international Monetary Fund,the economic survey revealed in volume I in January 2017.

But the major problem is that the Fiscal responsibility and budget Management Act does not allow the government  to borrow from the RBI. Therefore government will have to provide resources through special SVP that will have to be in-conformity with law.

The government had hoped to reap significant windfall gains from the decision to withdraw Rs 500 and Rs 1000 notes. But now with over 99% of demonetised notes coming into the banks, the government has to take the path of recapitalization bonds route to fund the banks.Banks are incapable to lend due of the tough regulations and norms on bad loans which have ballooned to Rs 9.5 lakh crore as of June 2017. The situation has been aggravated by the fact that there are no fresh investments forthcoming.

It is besides the point as to who advised him but it was the Prime Minister Narendra Modi’s sole responsibility to guard against such a slippery financial situation.


By: Arti Bali

Senior Journalist

DISCLAIMER : Views expressed above are the author’s own.

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