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Lehman Brothers collapse: Lessons for India on rising NPA problem

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lehman crisis Lehman crisis: The Indian banking system has been reeling under the weight of bad loans, with 26 banks together – both private and public . (Reuters)

It’s going to be ten years since Lehman Brothers collapse hit the US on September 15, 2008, triggering a financial crisis all across the world. Even though India’s GDP growth posted record numbers in April-June quarter, the macros are exerting pressure. The rupee is in a free-fall, and crude oil prices are surging. India’s current account deficit (CAD) has widened to 2.4 percent of GDP in the quarter ending June 2018. But, what’s most disturbing for the economy is the problem of ballooning non-performing assets (NPAs).

The Indian banking system has been stressed under the load of bad loans, with 26 banks together both private and public posting gross NPAs of more than Rs 7.31 lakh crore, translating into a surge of nearly 50 percent from the corresponding period last year.

Former RBI governor Raghuram Rajan in his recent note to the Parliament Estimates Committee had said that in 2006-08, period around Lehman crisis, when country’s growth rate was strong, a large number of bad loans came into existence. “A larger number of bad loans were originated in the period 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget,” he said, adding, “It is at such times that banks make mistakes.”

The bankers got ‘over-optimistic’ in this period and forgot to do due diligence which laid the foundation of the upcoming crisis, he had said. This is true for both Lehman bankruptcy and the US financial crisis, and the rising NPA mess in the country.

Big lending

The credit boom resulted in India in 2004-05 to 2007-08 due to low interest rates.  The lending by the financial institutions to industry climbed 30-35 percent year-on-year during this period, making this boom the biggest in 25 years in India.

“Unfortunately, growth does not always take place as expected. The years of strong global growth before the global financial crisis were followed by a slowdown, which extended even to India, showing how much more integrated we had become with the world. Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down,” Raghuram Rajan wrote in the note to the committee.


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