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Indian Banking Stress Analysis

A high caliber Investment Professional with an experience amounting over 30 years, majorly across various facets of Investment.

Banks Branches are Closing Down

Number of Bank Branches Closed

Number of Bank Branches Closed

Indian Banking Overview

Stress Test

Stress test is conducted to find how much more bad debts and other financial shocks a Financial Institutions can take. US and EU has developed Stress Tests after the Collapse of Lehman Brothers and Financial Crisis afterward.

India has no such tests ever conducted. The regulation for Declaring NPA made less stringent. Because of less stringent laws. It is very difficult to exactly calculate the extent of NPA in system.

The Financial System Can be Classified as

  • Banking ( Private, Public, Cooperative, Scheduled )
  • Non Banking Financial Companies
  • Insurance Companies (Life and Non Life )
  • Leasing Companies
  • Housing Finance Companies
  • Venture Funds
  • Mutual Funds
  • Chit Funds
  • Collective Investment Scheme

The serious question, what is the status of these companies. Three most important Challenges Faced by Indian Financial System

  • Failure of Regularity Supervision
  • Unaccounted Non Performing Assets
  • Poor Corporate Governance

Collapse of Financial Companies

  • IL&FS (Infrastructure Leasing and Finance Service)
  • Yes Bank
  • PMC Bank
  • Laxmi Vilas Bank
  • DHFL

Common Factor in all above collapse is Poor Regulatory Oversight and Corrupt Management. Laws and regulations are not followed and corruption is key factor is collapse of these Financial Institution.

Mergers and Shrinking Banking

The Indian Banking is Shrinking. The latest is Merger of HDFC and HDFC Bank. The company claim to make more than 20% annual net Profit. Real Question is Why?

HDFC and HDFC Bank Merger is to Save HDFC.

The Balance sheet does not speak Truth and future is gloomy, so they decided to merge. Total Job losses are huge.

Public Sector Bank Mergers

Government reduced total number of Public sector bank from 27 to 12 Banks. 7 Large Public Sector Bank, and 5 Small Public Sector Banks.

It has resulted in closing 7000 Bank Branches, loss of thousands of jobs. Government has invested more than 2 Trillion Rupees to recapitalize the bank. Banking situation in India is extremely sever.

The present banking situation is serious.

The Effect of Banking Mergers

The mergers are to create safe banks, reduce cost and create bigger banks. Digitization has increased ease of doing banking. This will bring Better efficiency ,reduced cost. These are stated goals of the mergers.

Truth is banking mergers are to save collapsing banks. Bank mergers are to reduce cost because there is no growth. The Banking mergers are creating more problems. It is stated in study that, these Mergers weakening the Banking System, and collapse can bring bigger crash.

NBFC and Other Financial Institutions

Non Banking Financial Companies basically Financing, Housing, Real Estate, Infrastructure and Consumer Finance. Unfortunately all these sectors are facing sever slow down and bad loans. NPA is increasing and it can bring collapse of Indian Financial System.

  • Moratorium on loan repayments,
  • credit guarantee schemes,
  • suspension of the bankruptcy code.
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The Regulators relaxed attitude on Declaring NPA is single biggest problem system facing. Because of Relaxed Norms, actual NPA is not known and needs independent third party stress test for all Banking and Financial Institutions.

Indian Banking

Credit Growth

Credit Growth

Why Banking is Collapsing

Why Banking is Collapsing

Five Major Collapse

Five Major Collapse

The Numbers do not Lie

Reduced Savings

Savings rate is Reduced to 18% from 25% for Personal Saving. This is huge downfall and it is difficult to cover. The reason for reduced savings is very simple, people are getting poor. Shrinking middle class and increased poverty. 200 million poor lost their jobs and become poor.

240 million Hungry

700 million Poor

9% Unemployment

25% Youth Unemployment, one of highest in the world.

These are unfolding like horror movie.

Credit Growth

Compounded annual growth rates (CAGR) of credit flow from banks and NBFCs over last 8 years -1.8% and -4.5%.

Banking Credit to GDP ratio

  • 2013 - 16.5%
  • 2021 - 3.5%

Compounded annual banking credit growth has been 10.6% for this decade. For the 2020-21 Financial Year, banking credit growth was approximately 5.5%, which was close to a seven-decade low.

What is the meaning of Slow Down in Credit Growth

The meaning is Slow Down in Credit Growth is very simple, there is no demand. No new major investment is needed in manufacturing, present capacity is more than enough.

The second reason is, there are not enough Credit Worthy customers ready to take loans.

Shocking Numbers

  • 215 tons of local Gold is sold during pandemic, this shows people used savings to survive during pandemic.
  • Millions of job losses and slowing economy has caused sever distress.
  • Most of Manufacturing is Running at 65% capacity, which is much below the minimum capacity utilization for new investment.
  • Increased Poverty is outcome f mismanagement of economy.
  • The government invested over Rs. 3 trillion to recapitalize these banks.

Banking Status

Half Baked Idea

Half Baked Idea

National Debt

National Debt

Credit Growth

Credit Growth

How Much Total NPA in the System

NPA of Indian Banking is highest in the world. As per reports and RBI numbers present NPA in Banking system is more than 15%. These numbers are when RBI relaxed reporting norms and many exemptions are provided during Pandemic. RBI never carried out stress tests for Banks and Financial Institutions. If EU and US stress tests standards are applied, this number will be double, i.e almost around 30% of total NPA in the system. This is not sustainable.

Where is the Problem

Total Mudra Loan more than 12 Lakh Crore. This micro and small scheme is highest NPA, means these loans are given keeping in mind loan will not be returned, loans are given without guarantees.

Real Estate Finance - more than 9 lakh unsold housing inventory. Total debt under stressed category is 2.5 trillion rupees, of this 1.35 lakh crore under sever stress. This is single biggest category of loan default.

Housing Loan - Large number of housing loan are under stress.

Infrastructure - Long terms infrastructure loans are facing stress because of slow down of economy.

Industrial and Corporate Loan - The recovery through NCLT is very low. The recovery is between 20% to 30%. This is really low. The banking is facing sever problem of bad debt recovery.

The NPA in banking and financial sectors is very high.

The lose Corporate Governance and Weak Regulatory Supervisory environment has made problem sever.

Total NPA with Advance Stress Test can be 55 Lakh Crore which is more than double the mentioned and accepted by RBI.

This 55 Lakh is very high and most of bank needs recapitalization. The system is One Incident away from Too Big To Fall moments.

Non Performing Assets

Total NPA

Total NPA

Debt to GDP Ratio

Debt to GDP Ratio

Companies Quitting India

Companies Quitting India

Gross NPA

Gross NPA

What Can Bring Crash of Financial System

Balance of Payments

India must repay debt worth 250 Billion USD by September 2022. It is not easy refinance this debt. Two major question at what rate it can be refinanced, how much it can be refinanced. Is the refinancing feasible.

Rupee is losing value very fast. The slowing economy, reduced exports and increased imports can cause havoc in the system.

Even if majority of the debt will be refinanced but substantial of it may not be refinanced. It will be refinanced at much higher rate. May be this refinancing is not feasible.

Present Current Account deficit is around 30 Billion per month. this is huge number.

The Foreign Institutional Investors are withdrawing from Indian Market. The increased interest rate by FED, slowing economy and depreciating currency can bring sever stress in the system.

India does not have enough Reserves to pay more than 7 months. This can go wrong. One Default can cause circulating effect.

Oil Prices

India imports almost 85% of its Crude (Oil and Gas). The Oil Prices are above 120 USD a Barrel. If Oil Prices remain high for extended period of time, India will face sever shortage and payment issue.

India is importing Coal because of sever shortage. India is world's largest producer of coal. In last 8 years, Coal India Limited has not increased capacity and sudden price rise has made sever coal shortages in India. India is importing coal and it can have sever impact on India's Balance of Payment.


Rupee is depreciating at Fastest Rate. Rupee can reach 85 by year end and can reach 100 by 2024.

Increasing interest rates, Global Slow Down and Balance of Payment is bringing Rupee under pressure. Inflation will rise, this will result in recession in country.

Commodity Prices

India is net importer of many Commodities. India imports metal, aluminum and other raw materials for Manufacturing.

India also imports Edible Oil, Pulses, Corn and many other Food. The Global Price rise is making it difficult and increasing local prices. This is putting sever pressure on India's Balance of Payment.

High Commodity Prices can bring Recession in India. Recession will bring collapse of Banking because of stress.

Global Slowdown

World Bank and IMF has warn of slow down of Global Economy. Europe and America is Facing the Recession. Any recession in Europe and America can cause sever strain on Global Economy and India can also go into recession.

In the present situation India Indian Economy can see Contraction in Fourth Quarter. This will bring more paid in the Banking.

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