# Banking Burst In Bharat

# DID YOU EVER NOTICE…?

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💡 In 2023, while banks all across the world were failing, not a single Indian Bank failed or faced a crisis. In fact, our banks were growing at a staggering rate during the exact same time. “**STATE BANK OF INDIA”** has gained 20% from its low. The **“INDIAN BANKING SYSTEM”** is quite resilient. Strong loan growth, higher yields, and lower credit costs ensure that FY23 was the most profitable year for India’s banking sector.
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## BUT YOU KNOW WHAT…??

* Indian banks were not always so "robust," and you would be shocked to know that there was a time when Indian banks used to fail like a house of cards.
    
* In fact, after the 2008 crisis, along with all the scams that were happening, India was also witnessing a Banking Crisis. All of this came to the surface in 2018 with the scam of **“PUNJAB NATIONAL BANK”.**
    

## SO THE QUESTION IS ???

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💡 Suddenly, from 2018 to 2024, how did we go from facing a banking crisis to becoming experts in avoiding one? While so many banks all across the world were failing, how did Indian banks stand strong even during the pandemic and the **GLOBAL ECONOMIC CRISIS?**
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## NON-PERFORMING ASSET

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💡 In the banking space there is an important term called **“NON-PERFORMING ASSET”**
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![](https://cdn.hashnode.com/res/hashnode/image/upload/v1739383699269/a02d5ebd-ac1b-48b1-aec9-7c964483e535.webp align="left")

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💡 In the above Diagram, MR John purchases a credit card from XYZ Bank. Due to financial issues, MR John is unable to pay the Credit Card Bill. After a year, the bank considers the Credit Card Debt as a NPA (NON-PERFORMING ASSET).
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* A NON-PERFORMING ASSET (NPA) is a loan or an advance where the principal or the interest payment remains overdue for a certain period of time. In most cases, an asset is classified as non-performing when loan payments have not been made for a period of 90 days. NPAs are essentially loans or advances that are in jeopardy of default.
    

![](https://cdn.hashnode.com/res/hashnode/image/upload/v1739383745002/c30e4e32-5498-4635-8cf1-ec1aca4f8c7e.webp align="left")

1. Now, if you look at this graph in 1992, the situation of our public sector banks was so terrible that the non-performing assets (bad loans) were as high as 25%.
    
2. In 2008, it reduced to less than 5%, but just like we see in this graph, after the 2008 crisis the NPAs slowly started rising again.
    
3. Suddenly, from 2015-2018—in just 3 years—the NPAs shot up from less than 5% to touch 15% in 2018.
    
4. So the question is… what exactly happened after 2008 and did it happen only because of the 2008 crisis? As it turns out, nobody expected the 2008 recession to happen.
    
5. Before 2008, the public sector banks went super bullish on lending for infrastructure and other projects. If you look at our economy from 1991-2000, we saw staggering growth.
    

![](https://cdn.hashnode.com/res/hashnode/image/upload/v1739383767410/710eca0d-d094-424c-9620-5cc1c428d461.webp align="left")

Look at this graph: from 1980 to 1990 our GDP per capita grew by just 27%. Similarly, from 1990 to 2000 it shot up by 16%. But from 2000 to 2010 it shot up by 67.2%. So in 2008, if you were a banker, you would expect the boom to continue, right?

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💡 HOW THE BANKS UNDER THE RBI CATEGORIZE THEIR LOANS …?? SO LET’S DIVE INTO IT
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The RBI (RESERVE BANK OF INDIA) instructs banks to sort their loans into:

* **STANDARD**
    
    > LESS RISK OF BORROWERS DEFAULTING
    
* **NON-PERFORMING**
    
    > HIGH RISK OF BORROWERS DEFAULTING
    

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💡 Now, these Non-Performing Loans get further broken down into sub-categories:
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1. **SUB-STANDARD**
    
    * Borrowers have defaulted for less than 12 months.
        
2. **DOUBTFUL**
    
    * Recovery is expected to happen at a loss.
        
3. **LOSS**
    
    * The bank expects the loss to happen for sure.
        

### LET’S COME BACK TO WHAT HAPPENED AFTER 2008

> In August 2008, which is just 1 month before the stock market crash of 2008, the RESERVE BANK OF INDIA introduced a rule called **ASSET QUALITY FORBEARANCE.**

> This practice of forbearance continued for 10 years. This is how bad loans started to become the SILENT KILLERS of the INDIAN BANKING SYSTEM.

> Between 2008 to 2012, we also witnessed scams in India which caused massive losses to the Indian economy.

> This is when DR RAGHURAM RAJAN became the Governor of India. When he reviewed the hidden NPAs of Indian banks, he found something absolutely shocking. He saw that even though the NPAs in public sector banks were rising, they were completely hidden in plain sight—and when the ASSET QUALITY review was actually conducted, the NPAs in India started spiking.

> This is how our public sector banks ended up being in one of the worst states in decades. In fact, DR RAJAN even said, “TOO MANY LOANS WERE MADE TO WELL-CONNECTED PROMOTERS WHO HAVE A HISTORY OF DEFAULTING ON THEIR LOANS.”

> This is also the reason why the number of PUBLIC SECTOR BANKS reduced from 27 to 12 in 2017. After the merger, the banks could pull their resources together to operate with better efficiency and reduce expenses.

> The INDIAN GOVERNMENT introduced something called the PROMPT CORRECTIVE ACTION framework. This framework sets guidelines based on the bank’s financial health indicators, including:
> 
> * CAPITAL RATIO
>     
> * ASSET QUALITY
>     
> * PROFITABILITY
>     
> * LEVERAGE
>     

Now, if any bank crosses any threshold, the RBI will immediately take strict action to prevent the bank from failing. This is how the RBI monitors every important bank in the country, ensuring that India does not face a financial crisis.

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💡 **CONCLUSION:** In the following concepts, the Reserve Bank of India first faced a banking crisis, learned lessons from the crisis, and designed a super-safe, strategic framework for our banks. This framework ensured that even while banks all across the world were failing, Indian banks stood tall—even during the pandemic and the global economic crisis caused by the Russia-Europe economic warfare. While listening to this story, you have just learned about one of the most important chapters of the Indian economy. I hope you found this case study valuable.
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