How Indian Public Banks Became A Disaster

03.02.2017 • Emerging Markets

By Vivek Kaul – The Vivek Kaul Letter (India) –

In this Special Edition of the Letter, we will look at the mess that prevails in the Indian public sector banks and why no workable solution is in sight.

Over the last few years, I have developed this habit of reading the Economic Survey in some detail.

And given that I read a lot of documents authored by the Indian government for a living, I can safely say that this is by far the best document authored by the government.

One reason why I like reading through the Survey is because it discusses some economic ideas in detail.

In the Economic Survey of 2016-2017, there is a chapter which goes into great detail on the merits and demerits of the concept of Universal Basic Income, a topic which is very hot right now in India. Over and above ideas, one comes across some good data on the Indian economy, which is very difficult to find otherwise.

Take a look at Figure 1 (on the next page). The data points which make up for Figure 1, help us arrive at very important conclusions. It’s just that other than the repo rate, the other data points, the average term deposit rate and the average base rate, are not publicly available on a regular basis.

The last time I came across these data points was when the previous RBI Governor Raghuram Rajan, referred to them in a monetary policy statement. Let’s analyse Figure 1 in some detail. The base rate is essentially the interest rate below which a bank cannot lend i.e. the interest rate at which a bank lends to its best customer.

The term deposit rate is essentially the interest rate that a bank pays on its fixed deposits.

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