Banking Sector Stress - India Vs UK

Swaswati Borpuzari · Feb 2, 2025

Banking Sector Stress: India vs. UK

The banking sector is a cornerstone of any economy, playing a crucial role in financial stability and economic growth. In recent years, both India and the United Kingdom (UK) have faced significant challenges in their banking sectors. These challenges, often referred to as "banking sector stress," encompass a range of issues including non-performing assets (NPAs), regulatory changes, and the impact of global economic conditions. This article explores the key differences and similarities in the banking sector stress faced by India and the UK, and how each country has responded to these challenges.

Non-Performing Assets (NPAs)

India: Non-performing assets (NPAs) have been a persistent issue in India's banking sector. NPAs are loans or advances that are in default or are in arrears for a significant period. As of 2023, the gross NPA ratio for Indian banks remains high, although it has shown signs of improvement. Historically, the high levels of NPAs have been attributed to several factors:

Economic Downturns: Periodic economic slowdowns have led to increased defaults, particularly among borrowers in sectors such as infrastructure and real estate.
Crony Capitalism: Close ties between politicians, business leaders, and banks have sometimes resulted in loans being given without adequate scrutiny.
Inadequate Risk Management: Some banks have lacked robust risk management practices, leading to poor loan quality.

To address the NPA issue, the Reserve Bank of India (RBI) has implemented various measures, including the Insolvency and Bankruptcy Code (IBC), which has been effective in resolving some of the larger default cases. Additionally, the Indian government has recapitalized public sector banks to strengthen their balance sheets.

UK: In contrast, the UK's banking sector has generally maintained lower levels of NPAs. The global financial crisis of 2008 exposed some vulnerabilities, but the UK's regulatory framework and the actions taken by the Bank of England and the Financial Conduct Authority (FCA) have helped to mitigate these issues. Key factors contributing to the lower NPA levels in the UK include:

Strong Regulatory Oversight: The UK has a robust regulatory environment that includes stringent capital requirements and regular stress tests to ensure banks can withstand economic shocks.
Prudent Lending Practices: UK banks have traditionally been more conservative in their lending, which has helped to maintain the quality of their loan portfolios.
Economic Resilience: The UK's diversified economy and strong financial services sector have provided a cushion against economic downturns.

Regulatory Changes

India: India has undergone significant regulatory changes aimed at strengthening the banking sector. These changes include:

Insolvency and Bankruptcy Code (IBC): Introduced in 2016, the IBC has streamlined the resolution process for NPAs, making it more efficient and transparent.
Prompt Corrective Action (PCA): The PCA framework allows the RBI to take corrective measures when a bank's financial health deteriorates, including restrictions on lending and management changes.
Digital Transformation: The Indian government has encouraged the adoption of digital banking solutions to increase efficiency and reduce operational risks.

UK: The UK has also implemented several regulatory changes to enhance the stability and resilience of its banking sector:

Banking Reform Act 2013: This act introduced measures to ensure that banks could be resolved without using taxpayer funds, such as the 'bail-in' tool, which allows regulators to write down or convert senior unsecured debt into equity.
Basel III Implementation: The UK has adopted Basel III regulations, which require banks to hold higher levels of capital and liquidity to protect against financial shocks.
Financial Conduct Authority (FCA): The FCA has increased its focus on consumer protection and ethical business practices, ensuring that banks operate in a fair and transparent manner.

Impact of Global Economic Conditions

India: India's banking sector has been significantly affected by global economic conditions, particularly the slowdown in global trade and the impact of the COVID-19 pandemic. The pandemic led to an increase in NPAs as businesses struggled to meet their financial obligations. However, the Indian government and the RBI have taken steps to support the sector, including moratoriums on loan repayments and additional liquidity measures.

UK: The UK's banking sector has also faced challenges due to global economic conditions, including the impact of Brexit and the COVID-19 pandemic. Brexit has introduced uncertainties in the financial sector, particularly regarding the loss of passporting rights and the potential impact on cross-border banking activities. The pandemic led to a temporary increase in NPAs, but the UK government and the Bank of England provided comprehensive support, including loan guarantees and quantitative easing.

Government and Regulatory Responses

India: The Indian government and the RBI have taken a multi-faceted approach to address banking sector stress:

** Recapitalization:** The government has allocated significant funds to recapitalize public sector banks, helping them to meet regulatory capital requirements and improve their ability to lend.
** Regulatory Reforms:** The introduction of the IBC and the PCA framework has been instrumental in improving the health of the banking sector.
** Digital Initiatives:** The government has promoted the use of digital banking to increase financial inclusion and reduce operational costs.

UK: The UK government and regulators have also taken proactive steps to mitigate banking sector stress:

** Fiscal Support:** The government introduced various fiscal measures, including loan guarantee schemes and direct funding, to support businesses and individuals affected by the pandemic.
** Monetary Policy:** The Bank of England has used monetary policy tools, such as quantitative easing, to maintain liquidity and support the economy.
** Regulatory Flexibility:** Regulators have provided flexibility in regulatory requirements to help banks navigate the challenging economic environment.

Conclusion

While both India and the UK have faced banking sector stress, the nature and extent of the challenges differ. India has been grappling with high levels of NPAs and has implemented significant regulatory reforms to address this issue. The UK, on the other hand, has maintained lower NPA levels and has focused on enhancing regulatory oversight and consumer protection. Both countries have taken proactive steps to support their banking sectors during periods of economic stress, but the approaches have been tailored to their specific economic and regulatory environments.

The ongoing efforts to strengthen the banking sector in both countries are crucial for ensuring financial stability and supporting economic growth. As the global economy continues to evolve, both India and the UK will need to remain vigilant and adaptive to new challenges and opportunities.

LekshmiGPilllai · Jun 9, 2025

amit2011 said:
Banking Sector Stress - India Vs UK

By: Amit Bhushan Date: 21st May 2016

It is said that democratic polity in India draws a lot of inspiration from democracy in more mature countries like UK from where we imported our constitution. The United Kingdom was impacted by crisis in their banking sector as a result of financial meltdown in the USA in around 2008 which subsequently engulfed the whole world but Europe in particular was much badly impacted. While the government had to step in with tax-payers money to bail out the banks which were mostly private however it did so with strict conditionality that the small enterprises as well as household credit supply should continue uninterrupted.

In fact some of the conditions related to loans to individuals/employees losing jobs were turned even friendlier. This ensured political support for the bank bailout although dole out of tax-payers funds to bail out banks still remains unpopular. Much of the population still wants capping on salaries of bankers as well as higher capitalization so that banks manage their own affairs by absorbing all business risks on their own rather than bothering taxpayers or creating conditions that freezes normal functioning of the markets.

The regulators as well as legislators seen pushing through the same remain popular while those free market champions who are trying to shrug off the bailout package as happenstance (& no corrective measures required) are losing ground. By comparison, what we see in India is that banks have lost money on corporate debt which is not regulated i.e. no law or statute forces the banks to lend to the sector; and by implication banks can choose to be as strict as possible in making these credit evaluations. This seems to be causing some consternation and Public sector banks are seeking tax-payers money to bail themselves out.

Now there seems to be political forces as well as intelligentsia in support for the move as this accordingly will propel economic growth however this is being done without any correctives so that credit supply for the small businesses and retail remaining intact. While the banks have indeed cried hoarse in the past about agri-sector stress and governments have intervened with loan waivers which the same intelligentsia opposed. This opposition was on account of cultivation of the practice of not servicing loans by agriculturalists or even allowing banks with adverse selection practices which would tend to derail the economy. However when it comes to corporate loans, no data is released that which loans or accounts have been bad for how long.

The information on past bail out for the groups or writeoff / haircut or interest waivers is withheld from public in public interest (or on account of privacy of banking data, which we do not know if it should apply on writeoffs/hair cut since defaulter's list is a public list). What is discussed is simplistic issues like steel & power sector facing low demand and roads being held on account of clearances as reasons for much of the stress. A look as the history of defaults and past bail outs received by these account holders can be quite revealing.What is being discussed is accounting treatment that can be resorted to these loans or fiscal measures for the stressed sectors to bail out the promoters.

While government resorting to tariff and non-tariff measures in conjunction with the affected industry as well as the consumer industry might have support and the resultant impact on people will be witnessed in electoral ramblings. It is however the banking related measures whereby which the defaulters are perennially protected or even continued to be lent with more loans (evergreening of these loan accounts), is a measure that needs to be checked. This denies other borrowers with their chance as well as banks developing an unhealthy practice of not competing to seek enough credit worthy clients, which actually kills entrepreneurship. With India making noises around startups and running multiple schemes, let's see how it pans out.

Thank you for this thorough comparative analysis of banking sector stress in India and the UK, highlighting the divergent approaches and challenges faced by both countries.

Your explanation of the UK’s response to the 2008 financial crisis—where the government intervened decisively with taxpayer-backed bailouts but ensured that credit flow to households and small businesses remained uninterrupted—provides a clear picture of a measured crisis management approach. The political balancing act of maintaining public support by protecting consumers while imposing stricter conditions on banks, such as capping bankers’ salaries and requiring higher capitalization, illustrates a commitment to both market stability and accountability.

In contrast, your discussion of the Indian banking sector’s issues around corporate debt is eye-opening. The fact that public sector banks seek government recapitalization without transparent corrective mechanisms raises significant concerns about moral hazard and long-term financial discipline. The lack of transparency regarding non-performing assets (NPAs), write-offs, and the history of corporate defaults only adds to the opacity, potentially allowing “evergreening” practices that prolong unhealthy lending and undermine entrepreneurship.

Your critique of how political pressures and sectoral interests influence credit flows, particularly the treatment of agricultural loans and corporate debt, underscores a key difference in institutional governance and regulatory enforcement between the two countries. The point that supporting stressed sectors through tariffs or fiscal measures may have political merit, but should not come at the expense of sound banking practices, is particularly well made.

As India pushes forward with ambitious startup and economic growth initiatives, the banking sector’s ability to efficiently allocate credit to genuinely creditworthy clients will be crucial. Unless there is a concerted effort to improve transparency, enforce accountability, and prevent the protection of chronic defaulters, the banking system risks perpetuating inefficiencies that could stifle innovation and entrepreneurship.

Overall, your article highlights the importance of striking the right balance between government intervention, regulatory oversight, and market discipline in maintaining a healthy banking ecosystem—a lesson that remains relevant globally.

Priyani Gupta · 2025-06-18T11:45:40+0530

amit2011 said:
Banking Sector Stress - India Vs UK

By: Amit Bhushan Date: 21st May 2016

It is said that democratic polity in India draws a lot of inspiration from democracy in more mature countries like UK from where we imported our constitution. The United Kingdom was impacted by crisis in their banking sector as a result of financial meltdown in the USA in around 2008 which subsequently engulfed the whole world but Europe in particular was much badly impacted. While the government had to step in with tax-payers money to bail out the banks which were mostly private however it did so with strict conditionality that the small enterprises as well as household credit supply should continue uninterrupted.

In fact some of the conditions related to loans to individuals/employees losing jobs were turned even friendlier. This ensured political support for the bank bailout although dole out of tax-payers funds to bail out banks still remains unpopular. Much of the population still wants capping on salaries of bankers as well as higher capitalization so that banks manage their own affairs by absorbing all business risks on their own rather than bothering taxpayers or creating conditions that freezes normal functioning of the markets.

The regulators as well as legislators seen pushing through the same remain popular while those free market champions who are trying to shrug off the bailout package as happenstance (& no corrective measures required) are losing ground. By comparison, what we see in India is that banks have lost money on corporate debt which is not regulated i.e. no law or statute forces the banks to lend to the sector; and by implication banks can choose to be as strict as possible in making these credit evaluations. This seems to be causing some consternation and Public sector banks are seeking tax-payers money to bail themselves out.

Now there seems to be political forces as well as intelligentsia in support for the move as this accordingly will propel economic growth however this is being done without any correctives so that credit supply for the small businesses and retail remaining intact. While the banks have indeed cried hoarse in the past about agri-sector stress and governments have intervened with loan waivers which the same intelligentsia opposed. This opposition was on account of cultivation of the practice of not servicing loans by agriculturalists or even allowing banks with adverse selection practices which would tend to derail the economy. However when it comes to corporate loans, no data is released that which loans or accounts have been bad for how long.

The information on past bail out for the groups or writeoff / haircut or interest waivers is withheld from public in public interest (or on account of privacy of banking data, which we do not know if it should apply on writeoffs/hair cut since defaulter's list is a public list). What is discussed is simplistic issues like steel & power sector facing low demand and roads being held on account of clearances as reasons for much of the stress. A look as the history of defaults and past bail outs received by these account holders can be quite revealing.What is being discussed is accounting treatment that can be resorted to these loans or fiscal measures for the stressed sectors to bail out the promoters.

While government resorting to tariff and non-tariff measures in conjunction with the affected industry as well as the consumer industry might have support and the resultant impact on people will be witnessed in electoral ramblings. It is however the banking related measures whereby which the defaulters are perennially protected or even continued to be lent with more loans (evergreening of these loan accounts), is a measure that needs to be checked. This denies other borrowers with their chance as well as banks developing an unhealthy practice of not competing to seek enough credit worthy clients, which actually kills entrepreneurship. With India making noises around startups and running multiple schemes, let's see how it pans out.

Your article delves into a significant and often overlooked aspect of financial governance—bank bailouts and the disparity in treatment between large corporates and other economic contributors like small businesses and the agricultural sector. Your comparison with the UK post-2008 crisis provides a solid reference point and rightly raises critical concerns about transparency, fairness, and systemic reform in the Indian context.

Logically speaking, it is imperative to distinguish between systemic bailouts that come with conditionality and those that do not. The UK government, during the 2008 financial crisis, infused capital into failing banks but imposed strong accountability measures, ensuring credit flow to small enterprises and affected households. This safeguarded both public trust and the broader economy. In India’s case, the lack of transparency in corporate debt defaults and subsequent bailouts appears to be fostering a culture of impunity rather than accountability.

Practically, your article raises a red flag about evergreening of loans—an unhealthy practice where defaulting accounts are refinanced to mask the problem rather than resolve it. This not only distorts bank balance sheets but also crowds out deserving borrowers, especially from MSME and startup sectors. The result is stagnation in grassroots-level entrepreneurship despite a national push towards a startup-friendly ecosystem. This paradox must be addressed if India is to truly harness its demographic and innovation potential.

Your critique about the selective outrage of intelligentsia and policymakers is appreciable and thought-provoking. Loan waivers in the agricultural sector are often met with resistance on the grounds of moral hazard, but the same lens is conveniently avoided when it comes to large corporations. If public money is involved, then public accountability must follow. The opaque handling of write-offs, haircuts, and interest waivers for corporates undermines the very idea of democracy and financial equity.

However, your article could benefit from a deeper dive into potential solutions. While highlighting problems is vital, recommending reforms—such as mandating public disclosure of large corporate NPAs, strengthening bankruptcy proceedings under IBC, or linking bank management’s bonuses to NPA recovery rates—would empower your argument further. Additionally, mechanisms to incentivize lending to MSMEs and discourage lax corporate credit evaluations should be part of the discourse.

A slightly controversial yet vital point in your article is the criticism of “simplistic narratives” used to justify corporate defaults—like demand shortages or regulatory bottlenecks. While these are valid concerns, they often serve as smokescreens for mismanagement or overly ambitious expansion plans. Taxpayer money should not be a cushion for poor corporate strategy.

To conclude, your article is an insightful and balanced critique, but the demand for systemic reform must now be accompanied by targeted policy advocacy. Democracies mature not only by imitating others, but by learning from their failures and crafting context-specific solutions. India’s economic future depends not only on how we nurture innovation, but also on how fairly and transparently we manage failure.

Hashtags:
#BankBailouts #CorporateAccountability #FinancialReform #EvergreeningLoans #StartupIndia #PublicMoneyMatters #NPATransparency #InclusiveGrowth #DemocraticEconomy #IndiaBankingCrisis

Dhruv Bindhani · 2025-06-18T16:59:29+0530

amit2011 said:
A Tale of Two Banking Crises: India's Corporate Debt vs. UK's Financial Meltdown
Amit Bhushan, in his insightful 2016 analysis, draws a compelling comparison between the banking sector stresses experienced by the UK around 2008 and India in 2016. The writer masterfully highlights critical differences in the genesis of these crises, the governmental responses, and, most importantly, their ethical implications for public funds and economic equity. Bhushan's clear articulation of these distinct scenarios offers a valuable lens through which to examine the nuances of financial governance and accountability.

UK's Response: Conditionality and Public Support
Bhushan begins by contextualizing the UK's banking crisis within the broader 2008 global financial meltdown. He effectively notes the significant taxpayer-funded bailouts provided to predominantly private banks, but critically emphasizes the strict conditionality imposed by the government. This crucial aspect ensured that credit supply to small enterprises and households continued uninterrupted, even turning "friendlier" for individuals losing jobs. The writer shrewdly points out that this direct benefit to the populace, despite the unpopularity of bailouts, garnered political support. This highlights a key lesson: public intervention is more palatable when accompanied by tangible, widespread benefits and clear accountability, including calls for capping bankers' salaries and higher capitalization.

India's Conundrum: Unregulated Corporate Debt and Opacity
In stark contrast, Bhushan presents India's banking stress as originating from unregulated corporate debt. He incisively observes that Indian public sector banks have lost money on corporate loans where they had "no law or statute" forcing them to lend, implying a discretionary choice in credit evaluation. This foundational difference immediately raises questions of responsibility and systemic oversight.

A particularly crucial aspect of Bhushan's critique is the lack of transparency and corrective measures in India's proposed bailouts. While political support for such a move exists, the absence of conditions ensuring continued credit supply to small businesses and retail is a glaring omission. The author draws a sharp, insightful parallel to past loan waivers for the agri-sector, which were rightfully opposed for fostering a "practice of not servicing loans." However, he laments the stark difference in treatment for corporate defaulters, where information on bad loans, write-offs, or past bailouts is withheld "in public interest (or on account of privacy of banking data)." This opacity is a central theme, preventing public scrutiny and accountability.

Ethical Fault Lines and Future Implications
Bhushan's most powerful critique lies in his discussion of the "evergreening" of corporate loan accounts and the perennial protection afforded to defaulters. This practice, he argues compellingly, "denies other borrowers with their chance" and fosters an "unhealthy practice of not competing to seek enough credit worthy clients," ultimately "killing entrepreneurship." This highlights a profound ethical dilemma and a systemic flaw that hinders healthy economic competition and growth, especially in a nation like India that is "making noises around startups."

In conclusion, Amit Bhushan's piece is a masterclass in comparative financial analysis. It not only dissects the distinct challenges faced by two major economies but also acts as a potent call for greater transparency, accountability, and equitable policy in banking. His incisive comparison between the UK's conditional, public-benefiting bailouts and India's opaque, corporate-centric approach offers critical insights into what constitutes responsible financial governance and how it directly impacts national development and economic justice.

Banking Sector Stress - India Vs UK

Banking Sector Stress - India Vs UK

Swaswati Borpuzari

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