Reasons behind Banking Crisis

There’s an undeclared banking crisis going on in our country and here we would like to throw some light upon it. This started as an NBFC crisis but now it has snowballed into a Banking crisis.

Anything that happens for the first time bestows an additional nervousness. So, the problem is that India is facing such a situation for the first time. Although, the world has seen it before.

What causes a banking crisis?

India has a famous saying ‘Behti Ganga Me Haath Dhona’ which means making the most out of a favorable situation. This saying was realized by our banks when the market was bullish. They lent recklessly when the market was bullish. Now, when there’s a slowdown, we’re seeing the results.

In this situation, weaker banks will get hit for sure. Incidentally, PMC and Lakshmi Vilas Bank have already come to their knees. If we analyze the entire scenario, we’ll see that what started as an NBFC crisis slowly got amplified. The banking industry felt the tremors and due to references drawn from recent small banks’ failures, the depositors started to panic.

Whenever such a situation arrives, it instills ‘Lack of Confidence’ especially in depositors who’re currently engaged with smaller banks. Due to this, if they stop depositing the money midway and start collective withdrawals, even perfectly healthy banks would be grinded.

Think of a situation when the depositors collectively close their accounts with a bank. The bank won’t even have iota of a chance to survive! Interestingly, a bank only holds funds equal to 15-20 percent of its total deposits. So, if 20 percent of its depositors close their accounts and withdraw their funds in one go, the bank will fail for sure.

This is an extreme situation and the meltdown would usually take a few weeks’ time. But, it could now be faster because of an uncalled-for villain, that spreads information like a wildfire- Social Media. This is the first time when Social Media would be playing such an important role in a crisis situation or in other words ‘Fueling the Fire’.

Banks are like – ‘Heads You Win, Tails I Lose’

If the depositors panic, they’ll withdraw their money from the bank. In this case, the bank will fail. Even if the bank is financially healthy, it will fail due to consumer sentiment. And, nothing would be able to change the consequence. In this situation, what we can best do is, not believe the rumors and take informed decisions.