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  • Bank closures, restricted lending, and collapsing institutions...

  • India's financial sector is in trouble, and the contagion is starting to bite in the real economy.

  • So what is going wrong with India's lenders, and just how deep do the problems go?

  • India's economy has long depended on state-run banks.

  • But poor governance and cosy relationships with powerful tycoons helped to contribute to a credit crunch, meaning borrowers had to find new sources of money.

  • So-called shadow banks sprung up, but these less-regulated lenders gave out yet more risky loans, especially to the real estate sector.

  • Last month, the previously obscure Punjab and Maharashtra Co-operative Bank was taken over by authorities, its top executives arrested after they engaged in heavy lending to a single property company.

  • About 1.5 million account holders had access to their savings restricted.

  • Panic ensued, with customers demanding their money back.

  • Rumours of further closures spread like wildfire, and the country's central bank took to Twitter to reassure the public.

  • The run on PMC happened almost exactly a year after the collapse of IL&FS, a huge shadow lender.

  • That was portrayed at the time as a one-off event, but economic growth has since slowed to a six-year low,

  • And investors fear more lenders will go bust.

  • Loans are now much harder to come by, businesses find it hard to expand, and consumers are struggling to get loans for houses or even motorcycles.

  • Big shadow banks have seen their share prices plummet, while traditional banks are still struggling to recover a year's worth of unpaid loans.

  • If more lenders go bust, it could create a domino effect and spread like a virus through the wider economy.

  • Economists say they see echoes of the chain of events that led to the US financial crisis, as once high-flying lenders succumbed to the pressure of bad debt.

  • And they're worried India's economy could now face a reckoning of its own.

Bank closures, restricted lending, and collapsing institutions...

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Why India's financial sector is in trouble | FT

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