India’s banking system is flirting with a Lehman moment

WHEN NARENDRA MODI was elected prime minister of India in 2014, his plan was to revive its GDP growth rate back to the near-double-digit figures seen in the mid-2000s. Few would have guessed that the biggest threat to that goal was the financial industry. For several years state-run banks have failed to get to grips with a $100bn mountain of dud loans. Now panic has seized parts of the privately run system. One bank boss says the situation is as bad as the Asian crisis of 1998 or the global crash of 2008.

In September IL&FS, a financial firm that owns and finances roads and power plants, defaulted on some of its $13bn of debt. The contagion has struck India’s shadow banks, which rely on $250bn-300bn of borrowing to fund themselves. Their market value has collapsed by a median of 40% this year. A bitter row about how to respond has erupted between the government and the Reserve Bank of India (RBI), the largely independent...



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