Ila Patnaik, Columnist

India's Banks Need a Stronger Watchdog

Simply privatizing state banks won't prevent another crisis.

April 18, 2018 at 9:00 PM UTC

Ila Patnaik is an economist and professor at the National Institute of Public Finance and Policy in New Delhi. She previously served as principal economic adviser to the government of India.

ICICI's bad loans have surged, too.
Photographer: Dhiraj Singh/Bloomberg

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To many economists, the solution to India’s bad-loan crisis appears as obvious as the problem: Privatize state-owned banks, which have racked up billions more in soured loans and performed much worse than their private-sector counterparts. Yet, unless the government first strengthens its ability to supervise all banks, public and private, selling some of them off will be slim guarantee against another crisis.

One can understand the urge to privatize. A long-mooted bankruptcy law finally passed last year allows any single creditor to initiate the bankruptcy process. This has disrupted the earlier cozy system, whereby banks hid the full extent of their soured loans and the Reserve Bank of India, which oversees the sector, looked the other way.