The defining problem of the Indian economy is the lack of private investment. A stressed financial system is one factor hampering private investment. In this note, we review the stress in a few components of the financial system.
About 35% of the non-financial firms' balance sheet is under stress. We identify a few large firms that have high credit stress.
About 66% of the banking balance sheet is under stress. We estimate that the equity capital shortfall in Indian banking is about Rs.8 trillion to Rs.10 trillion. We identify seven stressed banks. There is, however, a surprising rise in bank credit growth in recent months.
Non-bank finance companies were subjected to a stress test starting in August 2018, when IL&FS defaulted. We identify a few large NBFCs that have high credit stress.
Mutual funds first faced redemption pressure owing to inadequate recognition of stressed bonds. A next wave of difficulties has come, with one default by a mutual fund for redemption of a "Fixed Maturity Plan." This has created pressure on the asset growth of mutual funds.
Solving these problems requires commitment of money, political capital and staff time. In many cases, these expenditures have been postponed into the future. This "policy debt" will have to be paid from June 2019 onwards, i.e. after the elections. In the meantime, there are positive feedback loops through which the difficulties reinforce each other. A key advantage for economic policy makers in June 2019 will be that they would have a five-year time horizon in which to undertake difficult and long-term solutions.
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