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The onset of the new financial year FY25, commencing on April 1, 2024, does not promise any relief from the economic challenges persisting since the previous fiscal year. In recent months, various banks and financial institutions in India, including Bank of Baroda, HDFC Bank, Kotak Mahindra Bank, PayTM, IIFL, JM Financial, and Paisa Lo, have been making headlines for all the wrong reasons. Surprisingly, this roster encompasses both public and private banks, as well as Non-Banking Financial Companies (NBFCs) and Fintech firms, representing the entire spectrum of the financial sector. This should prompt policymakers and analysts to reflect on whether the emerging trends in India’s financial sector are moving in a positive direction or posing serious risks. While individual banks (both public and private), NBFCs, and Fintech companies are grappling with their respective challenges, collectively they signal looming financial threats for the Indian economy and its citizens.

Concerning banks, issues persist on both the deposit and loan fronts. Recent media reports have revealed a liquidity shortfall of approximately Rs. 3 trillion in Indian banks by the end of January 2024, marking a 14-year high. This decline is attributed to reduced government spending, festival-related expenditures, and a decrease in public deposits. Consequently, banks have been compelled to borrow from the market at elevated rates by pledging securities and issuing AT1 bonds. Moreover, with high-interest rates, depositors are drawn towards savings and fixed deposits, thereby diminishing the number of current accounts. This trend has adversely impacted bank profitability as the net interest rate margin, i.e., the difference between interest earned on borrowings and interest paid on deposits, has shrunk.

Additionally, a concerning trend is emerging in the realm of debt. Personal loans continue to be procured by individuals, even at high interest rates, amidst a backdrop of mass unemployment and economic downturn. Meanwhile, smaller banks, flouting banking norms, persist in extending loans to financially vulnerable individuals in a bid to sustain themselves. These trends in India’s financial sector are undeniably worrisome. The surge in personal loans, especially amid widespread unemployment and economic stagnation, coupled with small banks deviating from regulatory standards in loan disbursement, could spell impending disaster.

It’s noteworthy that the government and the Central Bank are not oblivious to these challenges and have taken steps accordingly. However, these directives are primarily adhered to by larger banks, and only to a limited extent. Over the past year, the Reserve Bank of India has issued directives urging banks to maintain higher currency reserves to tackle financial uncertainties and curb credit card misuse. Banks have been discouraged from directly servicing personal loans, instead encouraged to route them through NBFCs and Fintech companies. However, many of these NBFCs and Fintech firms are extending loans to financially vulnerable individuals, often without collateral. Large NBFCs typically obtain loans from commercial banks at high interest rates and pass them on to smaller NBFCs or Fintech firms at even higher rates, who, in turn, lend to borrowers without stringent adherence to regulations or norms, sometimes even without collateral.

It is an open secret that income inequality in India has reached alar-ming levels, making it in- creasingly difficult for people to sustain themselves without steady employment and income. Taking advantage of this situation, financial companies are enticing people with attractive loan schemes, only to ensnare them in debt traps when they struggle to repay. Legal cases, such as the ongoing litigation involving a Fintech company in the Delhi High Court, where exorbitant interest rates were imposed on loans extended to an educational institution, underscore the severity of the issue. This case is just one among many under legal scrutiny across the country, indicating a pervasive problem.

With unemployment rates steadily climbing and income and savings dwindling, people are increasingly resorting to loans or depleting their savings to sustain consumption, leading to a surge in borrowing. Unfortunately, the economic forecast, with projections of a global recession by the World Bank and IMF, does not bode well for India’s income and savings outlook. Consequently, the risk of loan defaults has surged dramatically. Any financial turmoil in India would likely hit small banks, NBFCs, and Fintech firms first. Their inability to repay loans would subsequently strain larger NBFCs, ultimately affecting banks and potentially triggering widespread financial devastation. Amidst these emerging financial trends, deposits of the Indian public, traditionally deemed secure in banks, are now facing unprecedented risks.