Even before the pandemic struck, India’s financial sector was going through tough times. The stressed-assets problem was caused by a variety of factors, including government policies. Some borrowers found life harder when authorities suddenly tightened regulations, courts canceled coal-mining licenses and ordered payment of telecom fees. Dwindling natural gas supplies, falling real-estate and commodity prices and a rise in interest rates also eroded their capacity to repay loans.
Modi’s unprecedented decision in 2016 to invalidate almost all of the nation’s physical currency overnight devastated supply chains and created dangerous imbalances in the financial system as Indians rushed to deposit their bills. Add to that a blow out of a large and important shadow bank in the middle of 2018 crippled the sector.
“The continuance of real sector problems, partly policy-driven in the most recent period such as demonetization, has aggravated the banking situation,” said Chakravarthy Rangarajan, who headed the RBI during 1992-97. “It is an economic crisis.”
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