How Should the Indian Government Manage a Possible Collapse of the Financial System?

Why the Collapse of IL&FS should be a Warning Sign to the Indian Financial System?

It is no secret that the Indian Financial System is in acute crisis. Right from rising NPAs or Non Performing Assets, which are loans that have gone bad, to the high levels of exposure to risky assets and the ever increasing liabilities of the banks and the shadow financial institutions, the Cup of Woes for the system is indeed full.

In this context, it is worth asking if some parts or the entire system is at risk of collapse. For instance, there has been the near collapse of the NBFC or the Non Banking Financial Company IL&FS (Infrastructure, Leasing, and Financial Services) that led a near death spiral for this sector.

While there was a bailout and some sort of crisis management, it left much to be desired since the underlying problem has not gone away.

This problem pertains to the NPAs and the Liabilities of many Public Sector and Private Sector banks and FIs (Financial Institutions) that are yet to be addressed fully or even partially.

In other words, there is no guarantee that a repeat of the same crisis cannot happen and it remains to be seen as how the present government would handle it.

Avoiding Blame Games and Taking Steps to Contain the Problem

To be fair, the build-up of the NPAs and the Bad Loans has not happened overnight and it has been going on since the last decade or so, when the Great Recession struck.

Indeed, it can be argued that the previous government too allowed risky lending and lending without due diligence and other procedures.

On the other hand, while it might be politically expedient to indulge in Blame Games, this pointless and futile exercise does nothing to alleviate the underlying problems expect to garner eye balls in TV debates.

Therefore, it is our argument that the present government take proactive steps to address the problems in the Indian Financial System rather than glossing over them.

After all, it is better to take steps now rather than when it is Too Late that can cause irreparable damage to the credibility of the country and its government.

Moreover, there is nothing to say that there cannot be a complete collapse or at least a near collapse like what happened to the American financial system when the Investment Bank, Lehmann Brothers collapsed in 2008.

Thus, it is the case that the present government prepare an Action Plan that can be activated and actualised when the alarms go off and the bells toll in the system.

Denial and Suppression of Facts and Brute Force Does Not Solve the Problem

Having said that, there is no evidence that the government is doing anything of this sort, at least if one were to go by the public utterances of the Powers That Be.

More often than not, the Finance Minister appears clueless and the RBI or the Reserve Bank of India is fast losing its credibility.

Moreover, looking at the way the previous bank runs in the Cooperative Institutions such as the PMC or the Punjab and Maharashtra Cooperative Bank and the Shadow Banks, have been handled, it is more of a Kneejerk Reaction and a Panic management rather than any well thought and detailed plan of action that can assuage the concerns of the depositors and the other stakeholders.

Indeed, managing the optics is fine as long as there is no chaos on the ground or when the situation goes out of hand, resorting to authoritarian measures does not behove an aspiring economic powerhouse such as India.

However, that seems to the default plan of choice for the government wherein resorting to strong arm tactics and brute suppression of facts seems to be the order of the day.

Need for Reassurance When We Enter the Unknown Territory

Talking about facts and statistics, many experts are alarmed that the present government is not even bothering to present the full facts and accurate data pertaining to the financial sector.

Right from the Unemployment data to the figures put out in the Budget, there are concerns whether the true extent of the malaise and the problems are being revealed.

This is not even disconcerting, but also alarming since when the next crisis hits, the denial and the obfuscation of facts can lead to serious problems for the average person of this country. Indeed, when there is a loss of trust and credibility, panic sets in and using force to contain it can lead to social disorder.

This is where the Rub of the Problem lies and it is that we are entering into an Unknown Territory where the terrain is unfamiliar and can lead to a complete collapse of the financial system.

Therefore, it is our argument that there must be first acknowledgement of the problem and then, putting the correct facts in the public domain and at the same time, works with all stakeholders behind the scenes so that the crisis can be contained and managed.


Last, it is nobody’s case that the government should spark panic by crying Wolf. On the other hand, there is no harm in preparing for the worst and putting the action plan in place once the crisis strikes.

Indeed, the citizenry looks to the government for reassurance and hence, it is only proper for the latter to be transparent and credible in its approach.

To conclude, it is better to hope for the best and expect the worst and hence, all stakeholders need to come together and plan and prepare for any collapse of the Indian Financial System.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.