Here’s why fixing the banking system should be a top priority for India

Content from the Brookings Institution India Center is now archived. After seven years of an impactful partnership, as of September 11, 2020, Brookings India is now the Centre for Social and Economic Progress, an independent public policy institution based in India.

Editor's note:

This article first appeared in the Live Mint. Brookings India is an independent, non-partisan public policy research organisation based in New Delhi. The views are of the author(s).

The upcoming Union budget will be instrumental in shaping the contours of political and economic reforms during the remaining term of the National Democratic Alliance (NDA) government. Given that it will be the last full budget before the 2019 Lok Sabha election, the government needs to send a strong signal about its willingness to undertake serious reforms.

While there are several important issues that need to be addressed, one that requires immediate attention is the ailing banking sector. A robust and well-capitalized banking sector supports capital formation and economic activity by facilitating intermediation of resources between savers and borrowers. India saves close to 30% of its annual output. Given the importance of the banking sector in the financial system, it has a crucial role to play in channelling these savings to productive investments. The mounting stock of bad loans, which amounts to over Rs7 trillion, suggests that something has gone wrong with the process of financial intermediation in the banking sector and needs to be fixed.

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