A CROSS-BORDER SOLUTION TO A DOMESTIC PROBLEM: INDIA'S BANKS AND THE ROAD TO RECOVERING NON-PERFORMING ASSETS

A key issue within the nation’s present financial crisis has been the Indian banks’ hesitation to lend due to the increasingly large volumes of non-performing assets (NPAs) in their balance sheets

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Seven months into Prime Minister Narendra Modi’s landslide victory in the 2019 general elections, the good times have come to an end with ratings agency Moody’s downgrading its economic outlook for the country from “stable” to “negative,” pointing to both an economic slowdown as well as an ongoing crisis in the financial sector.

The Rise of Non-Performing Assets in India’s Banks

A key issue within the nation’s present financial crisis has been the Indian banks’ hesitation to lend due to the increasingly large volumes of non-performing assets (NPAs) in their balance sheets. Non-Performing Assets are an outcome when the borrower intentionally defaults on the loan payment or is unable to repay the loan due to poor economic conditions affecting his business.

What has become clear due to India’s new agreement with Switzerland (which enables the automatic sharing of tax-related information, and prioritizes it above Swiss banking privacy laws) is that a significant proportion of these funds are hidden rather than unavailable. This is also the case with the Indian tax authorities. It is estimated that there are $82 billion of non-performing assets and $343 billion of undeclared funds which could be taxed. The NPAs are particularly toxic for state-owned banks as they seriously hamper their ability to be profitable: Indeed, the Indian government is consolidating the number of state-owned banks by roughly 60%, perhaps because PSBs (public sector banks) account for approximately 90% of non-performing assets. NPAs are particularly problematic for a rapidly growing economy. This is because when Banks have access to their funds limited, they are less likely to provide funds which are necessary for a growing economy.