How 2024 Banking Reforms Will Shape India’s Economic Future
Attracting qualified directors and auditors remains another obstacle, particularly for smaller institutions. Moreover, the effective and transparent use of unclaimed funds transferred to the Investor Education and Protection Fund (IEPF) requires robust oversight to prevent inefficiencies or misuse. Balancing the objectives of inclusivity, stability, and operational efficiency with the costs and complexities of implementation will be critical for the bill to achieve its transformative goals.
The Banking Laws (Amendment) Bill, 2024, holds immense potential to modernise India’s financial system by fostering resilience, inclusivity, and governance reform.
However, its success hinges on addressing implementation challenges, especially for smaller banks, and ensuring transparent fund management.
The current high LDR (Elevated Loan to Deposit ratio) reflects sectoral or micro-imbalances rather than macro-imbalances. Large corporates are borrowing less, while HHs, MSMEs, and the agricultural sector are borrowing more but generating weak demand.
Furthermore, if viewed from a bird’s eye macro-lens, firms, due to a compressed demand position and slowing consumption expenditure are sitting on credit and cash without substantially investing in building ‘new capacity’ or inventories (a point this author has repeatedly argued).
My sense is that since credit (despite its high demand) is not being used to ‘invest’ (create something new or rather add to productivity), but rather is financing borrowings, or existing debt (from households to firm to government level), this will only create additional troubles for India’s macroeconomic position ahead, unless productive investment picks up across sectors.
Credit cycles will also become weaker over time (as there is only a certain amount of space till which the RBI will borrow and finance in the absence of sufficient savings, investments coming in) and that will subsequently affect overall growth too (which is already at a break event point if not at a precariously low position).
There is a strong need to intersectionally study and understand the deposit-credit growth gap problem in context to other macroeconomic vulnerabilities, which need the underlying market conditions and design to be structurally altered – not merely tinkered with.
The government’s inactions (its inability to understand the structural tenets of the current crisis and its economic and financial implications) may be ignored at the cost of the nation’s financial health and economic robustness, driving it down to its own peril ultimately.
A series of amendments in terms of a new Bill may be welcome in spirit but may do limited reform if other institutional stakeholders, including the (public and private) banking bureaucracy and management, fail to adequately implement it.
With inputs from Aryan Govindakrishnan and Ankur Singh.
(Deepanshu Mohan is a Professor of Economics, Dean, IDEAS, Office of Inter-Disciplinary Studies, and Director of Centre for New Economics Studies (CNES), OP Jindal Global University. He is a Visiting Professor at the London School of Economics, and a 2024 Fall Academic Visitor to the Faculty of Asian and Middle Eastern Studies, University of Oxford. This is an opinion article, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
