Bailing Out India’s Banks: A Breakdown, and What it Means for International Business
March 7, 2018
Well, here we go again: another banking crisis, another bailout.
This time, India’s public-sector banks (PSBs) need some help. By some, we mean a cool $32 billion.
Indian PSBs hold 70% of the nation’s accounts and funds, with smaller independent institutions taking up the rest. So, there was big incentive to fix the problem before it spiraled out of control.
But what exactly happened to India’s PSBs and, more importantly, why should you care?
Only a few days after Indian Prime Minister Narendra Modi lauded his country’s open and global economy at the World Economic Forum, his country’s banking system told another story.
The frequency of these stories reminds us again and again of the inefficiency and danger of outdated financial systems.
Though Modi and others are calling for internationalism, the world’s economies are bogged-down by banks.
Let’s see what happened this time.
India’s $32B Banking Bailout
The Indian government’s plan to inject funding into its floundering banking system was rumored in October of 2017. Now, as of January 24th, the country’s finance minister, Arun Jaitley, released the full plan for the bailout.
As mentioned, the government will provide $32 billion to state-owned banks. The hope is that more money will allow these banks to operate and generate profits on the back of new regulations.
The general consensus among Indian and international analysts is that the banks are failing for a few main reasons, and a lot of smaller ones.
One major reason is the PSBs tendency to lend money to corporations that can’t or don’t pay it back. The banks lose out on the initial payments, and a lot of the time the company doesn’t even pay back the interest.
Though this is argued as the main factor in the banking rebuild, there’s also a growing concern that the PSBs just can’t keep up with their new and innovative competitors.
In a Morgan Stanley report, India’s ecommerce market was projected to hit $200 billion by 2026.
Brick and mortar banks are gradually falling out of style, and the popularity of cashless payments and digital commerce is speeding up the process.
But, as many point out, PSBs continue to operate in this traditional way because of their intimate connection to the Indian government. Political agendas often guide lending decisions for better, but mostly, for worse.
Plus, the government is obligated to help these banks. Expecting to be bailed out whenever a bad banking decision is made really takes the pressure off making the right choices.
Long and Short-Term Consequences
In the US, we’ve seen the consequences of a banking crisis. The 2008 financial crisis still looms large over the economy, though the recovery process has gone relatively well.
But, to recuperate as quickly as possible, Indian PSBs are imposing policies that not only hurt domestic business, but international connections as well.
Cutting Back on Overseas Operations
Though Prime Minister Modi denied it in Davos, many Indian and international economists foresee Indian financial operations scaling back from global markets.
The hope is that the banks will have more incentive to invest in domestic businesses and maintaining operations at home, without stretching themselves too thin.
This could mean a few things. Indian PSBs may cut down on international investments, international money lending to the Indian diaspora, and may even cut back on international wire transfers for remittances, P2P transactions, and B2B payments.
Scaling back international operations could be devastating for both domestic and international businesses that need to send money overseas.
In the long term, this could sway businesses from working with India. It’s been suggested that the bailout could send India’s credit ratings through the roof.
The money that PSBs save may not be enough to inject back into the economy through trade and investment. So, despite the bailout, the future is still a bit shaky.
Continued Government Influence
Government meddling and influence has been blamed for many of the PSBs issues.
While many are calling for less heavy-handedness and more attention paid to banking customers, there’s still concern that the banks still feel indebted to the government that owns its largest stake.
Indian economist Shilan Shah fears that the government won’t “reduce its stake to below 51% or 50% so that the private sector can become majority shareholders.”
Many believe that this could be the long-term solution to the lending and regulatory issues that the PSBs have suffered. There are a few more plans for the revitalization of the banks, but many are skeptical of their effectiveness.
What Can Be Done
The Indian government hopes that the digitization of many services, including wires, transfers, and intuitive apps will greatly increase the value of their institutions.
Transparency is also a major concern. Like with many US banks, information on where your money is, where it’s going, and how it’ll get there is rarely available. Adding in government regulations, it takes even longer than it already does at a private bank.
Unsurprisingly, these solutions aren’t exactly promising.
As a result, Indian startups and technology companies are taking matters into their own hands, beginning what is being referred to as a “fintech revolution.”
The financial technology sector is booming in India, as people are looking to new and improved financial and banking models to make managing their money easier.
Companies like Veem thrive off of the widening of digital spaces.
Veem is a global payments platform that helps small businesses transfer funds internationally. Whether you’re in the US or India, Veem can make international payments easier, safer, and more cost-efficient.
Banks scaling back internationally is no problem. Veem doesn’t use intermediary banks, so your money doesn’t accumulate hidden fees, won’t get lost.
With a favorable exchange rate that’s better than your bank, Veem checks all the boxes for small businesses looking to go global.
What’s not to love?
Start the application process with Veem today and forget about banking blunders.