Bank vigilantes

AFTER years of frustrated attempts to bolster India’s corporate-bond markets, Indian policymakers are supplementing their efforts with a dose of bank-bashing to improve their chances of success. The plans will make life pleasingly hard for crony capitalists. But they could leave some Indian companies struggling for capital if implementation fails to go to plan.

Big companies across the world typically mix borrowing money from banks (which are flexible and can disburse loans quickly) with that raised from investors through bond markets (which offer lower interest rates). In India the balance has been skewed towards banks. This is, in part, because 70% of the banking sector is state-owned; at times, it has seen financing of even dubious projects as a calling rather than a way to make money. Issuing bonds has in any case been a fiddly business.

That system used to work, but a good chunk of the money loaned by banks in a mini-credit boom that started around 2011 now appears not to be coming back. Around 16% of total loans have been restructured or are distressed in some way, and some banks have been bailed out by the government. One cause of the bad lending is that ministers have forced bureaucrat-bankers to extend credits to their favoured industrialists, many of whom were heavily indebted to begin with. Astute businessmen knew how to borrow from one bank…Continue reading

This post was originally published in the Economist.

Bank vigilantes

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