Friday, December 20, 2019

It's the financial sector, stupid

Any strategy for recovery must focus resolutely on the financial sector. It's the NBFC crisis on top of a banking crisis that explains the state of the economy.

Negotiating one's way out of a financial crisis is a tall order. It cannot happen with a snap of the fingers. And, sorry, it has  little to do with "structural reforms". Deleveraging of corporates and resolution of NPAs takes its own time even in economies with private banking systems and well developed markets for stressed assets. In a public sector dominated system in which asset reconstruction companies haven't taken off and resolution of bankruptcy is still in its early stages,  recovery will take longer. Perhaps 2021-22 is when we expect growth to return to 7 per cent.

In the meantime, there are some positive signs in the financial sector. The resolution of Essar Steel has finally happened and bankers are due to get back around Rs 42,000 crore. And bank-led resolution has received a boost with banks taking a hair-cut of 52 per cent and SBI leading an effort to provide fresh loans to the company.

More in my article, Green Shoots in the Financial Sector?

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