The Past & Future of Indian Finance

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 catalyze growth, the government founded development financial institutions (DFIs) to supply term finance to various industries, forming the "DFI model." The primary DFIs were the Industrial Development Bank of India (IDBI), the Indus- trial Credit and Investment Corporation of India (ICICI), and the Industrial Finance Cor- poration of India (IFCI). [...] Finally, Section 10 presents evidence of the broader economy-wide impact of financial stress and the amplification of the financial shock in the real sector. [...] In the Indian context, however, the convenience yield may not have the same interpre- 35 tation due to the non-negligible interest-rate risk associated with government securities, given the size of bank exposure to G-Secs and the high duration of the bonds (Acharya 2018b).