This feedback loop between the financial system and the real economy created a macro-financial spiral, amplifying the impact of the initial shock from the defaults of IL&FS and DHFL. [...] A few months later, the default of DHFL restarted this spiral, with the impact this time also spreading to banks, as the default of DHFL deepened worries about the entire financial system’s cross-exposures to the troubled NBFC and the real estate sectors. [...] To understand the sequence of events and to recognize how big and severe the credit crunch was, it is useful to examine the decline in credit flow to the system in more detail (Figure 4). [...] To resolve and recover value from stressed assets, the Government of India passed the Insolvency and Bankruptcy Code in 2016, which overhauled the insolvency system.7 The framework was hailed as a landmark reform that aimed to resolve the cases of distressed debtors in a time-bound and creditor- driven manner. [...] To contain the risks to the system and avoid contagion, the Government of India filed a petition before the National Company Law Tribunal (NCLT) against the IL&FS Board.
- Pages
- 113
- Published in
- India
Table of Contents
- 1. Introduction 1
- 1.1. A Quarter Century of Credit in India Six Stylized Facts 2
- 1.2. Recent History A Financial Snapshot 5
- 1.3. The Indian Financial Crisis of 2018-20 7
- Some Puzzles 10
- 1.4. Fighting the Crisis the Pandemic 11
- 1.5. Reform Priorities 12
- 1.6. Related Literature International Comparisons 12
- 2. Part I Three Key Macro-Finance Developments between 2000-2018 13
- 2.1. The Rise and Fall of Infrastructure Finance 13
- 2.1.1. s Dfi p B B 2010 13
- 2.1.2. e s 201014 14
- 2.1.3. aQr a s a p 2014 15
- 2.1.4. s D p s B L 2014 17
- 2.2. Rise of the Shadow Banking Sector and Demonetization 17
- 2.2.1. n -B f C h f C 17
- 2.2.2. t r s B L 201318 20
- 2.2.3. D i i 201617 20
- 2.3. Increased Exposure to Real Estate 21
- 2.3.1. t r r e L 201318 21
- 2.3.2. n s r e s D r 23
- 3. Part II The Defaults of ILFS and DHFL 2018 and 2019 25
- 3.1. ILFS Default and NBFC Lending Collapse 2018 25
- 3.1.1. t iLfs D j s 2018 25
- 3.1.2. t C nBfC L 2018-2020 27
- 3.2. DHFL Default and Aggregate Lending Collapse 2019 28
- 3.2.1. v B e nBfC e 28
- 3.2.2. t DhfL D j -a 2019 28
- 3.2.3. C r f s s a 2019 29
- 3.2.4. a L C 2019Q3 2020Q1 30
- 4. Part III Why the Defaults Led to a Slowdown Macro-Finance Spiral 31
- 4.1. Rise in Uncertainty and Flight to Safety 33
- 4.1.1. e 1 r C s 33
- 4.1.2. e 2 r i s 35
- 4.1.3. e 3 s m p s m p 36
- 4.1.4. e 4 y C m 38
- 4.2. A Run on the Shadow Banking System 40
- 4.2.1. o m f i 40
- 4.2.2. e m f n f C iLfs 41
- 4.2.3. t i iLfs D 42
- 4.2.4. w iLfs D L a s -w r a C C 42
- 4.2.5. t i DhfL D 43
- 4.2.6. t C C p 44
- 4.2.7. w iLfs DhfL s L D L nBfC 45
- 4.2.8. o i 48
- 4.3. Spillover of Stress to Commercial Banks and Liquidity Hoarding 48
- 4.3.1. f s B p p B 48
- 4.3.2. D C -D r 50
- 4.3.3. s i m i r m B 50
- 4.3.4. w D B s 52
- 4.3.5. r f C D m 52
- 4.3.6. C D C m p t 54
- 4.3.7. L h L C 56
- 4.4. Broader Economy-Wide Impact 57
- 4.4.1. a L D f C r e 57
- 4.4.2. D s C 59
- 4.4.3. s i m s m -s e 59
- 4.4.4. s -r e i t i 61
- 4.4.5. GDp i 63
- 5. Part IV Policy Actions and Resilience Building 64
- 5.1. Policy Response Before the Pandemic 2018 and 2019 64
- 5.1.1. L o 66
- 5.1.2. m p a 68
- 1. i 68
- 2. m 68
- 3. o 68
- 5.1.3. m -f p 68
- 1. c nBFc s 68
- 2. r F msmE s 68
- 3. s r s 70
- 4. E i P 70
- 5. m P B 70
- 6. E s a -i F i 70
- 5.1.4. f p 71
- 5.2. Policy Response During the Pandemic 2020-22 72
- 5.2.1. k D p 72
- 1. yEs B c r m 2020 72
- 2. l r m m 2020 a 2020 72
- 3. i r r m m 2020 72
- 4. E l s B n a J 2020 72
- 5. E c l g s Eclgs m 2020 73
- 6. rBi r F s a a 2020 74
- 7. l v B F n 2020 d 2020 74
- 8. s r iBc 2020-2021 74
- 9. c B B F 2021 74
- 11. a r a o 2022 75
- 12. Pmc B c r 2019 2022 75
- 13. a n d B 2021-2023 75
- 5.3. Financial Health Restored 76
- 1. c d 77
- 2. P P l i r 78
- 3. l F l d B d 78
- 4. t s a i F 78
- 5. s s 79
- 5.4. A Calm Amidst Global Storms 2023 79
- 5.4.1. B f us e 79
- 5.4.2. i i f s i 80
- 6. Part V Challenges and Opportunities 81
- 6.1. Challenge 1 Indias Great Funding Imbalance 82
- 6.2. Challenge 2 Indias Financial Deepening Hurdle 83
- 6.3. Challenge 3 Indias Growth Strategy Trilemma 86
- 6.4. A Unique Opportunity Indias Digital Revolution 88
- P l uPi 89
- 1. c s B d t 89
- 2. E uPi c 89
- 3. E P - -P l 89
- 6.5. Orchestrating Reforms 90
- References 91
- Ratna Sahay 94
- Ravi Bansal 94
- Introduction 94
- Intermediation Channels and Bank Balance Sheets 94
- The NBFC Shock 95
- Identification Liquidity versus Solvency 96
- Policy Questions and Considerations 98
- Conclusion 98
- Rajeswari Sengupta 99
- Main Thesis of the Paper 99
- Banking Sector Crisis 100
- Objective of the Paper 105
- Some Gaps in the Paper 106
- References 108
- General Discussion 109
