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Why India’s Financial Sector Keeps Blowing Up

Police officers observe customers standing in line outside a Yes Bank branch in Mumbai on March 6.
Police officers observe customers standing in line outside a Yes Bank branch in Mumbai on March 6.Photographer: Dhiraj Singh/Bloomberg
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What’s up with India’s $1.7 trillion financial system? In the space of a couple of years, four major finance companies have been seized by authorities and the central bank has had to reassure the public multiple times. It’s a stark turnaround since the country emerged largely unscathed from the 2008 global financial crisis. Policy makers are grappling with a chicken-and-egg situation: Should they spur credit to boost economic growth or focus instead on cleaning up a banking system with the world’s worst bad-loan ratio?

The seeds were sown in a debt-fueled economic boom between 2007 and 2012, when banks increased loans by 400%. When the economy began slowing, many companies struggled to repay, making banks reluctant to lend more. That crimped the availability of credit and added a further drag on the economy, heaping pressure on indebted businesses. Some of the slack was picked up by non-bank lenders, or shadow banks, but one of the most prominent -- Infrastructure Leasing & Financial Services Ltd. -- became the first major blowup in 2018 in what became known as India’s mini-Lehman moment.