India needs urgent reforms to its financial set up as a result of banks have created a serious financial crisis by lending carelessly to big borrowers who were not capable or intention to repay their debts or borrowings. The financial system within the economy is like the rotating or circulating system in the human body.

And banks play an important role in its beating heart. If banks faltered, or bad debts stops the flow of money and the economy suffers or face of the equivalent of a heart attack. In India, banks are not doing well. They lent carelessly or without security. As a result, many loans have become overdue and a number of borrowers or falters are not in a position to pay back their debt or money.

This leads to many loan of non-performing asset (NPA). When borrowers are in arrears on payments of principal or interest for decided period, usually ninety days, the loan is classified as NPA. All banks around the world have some NPAs but, if they become more or too big, banks may collapse completely. If the banks are big enough, this cause damage to the entire financial setup. The Indian economy is going through a very bad mark recently.

Last quarter’s GDP growth rate fell to 5%, the growth in the previous quarter being higher at 5.8%. Many international entities and private entities in the business of forecasting are giving current fiscal year GDP growth at below 6%. The private consumption expenditure growth rate saw a huge crash from 11% to 3% between the last two quarters.

The manufacturing sector is stagnation, led by the horrible Performance of the automobile industry, Construction, and real estates are also in bad condition. The Periodic Labour Force Survey (PLFS) estimated India’s unemployment rate in 2017-18 to be 6.1%, which is over double that in 2011-12 when the unemployment rate was 2.7%.

The labor force participation rate is also abysmally low at 37%.According to CARE Ratings, India had the 5th highest NPA ratio in the world, ranking only after Greece, Italy, Portugal and Ireland. India’s NPA ratio stands at 9.85%, while major economies such as Britain, the US, Japan, and Germany have ratio less than 2%.

According to the latest Financial Stability Report of the Reserve Bank of India (RBI), the NPA ratio is set to degrade to 12.2% by March 2019, which would put India in 4th position, overtaking Ireland. As per the RBI, 11 public sector banks are under the prompt corrective category, which means that the poor quality of balance sheets have to be addressed immediately to avoid potential damage.

NPA crisis is a result of a deeply flawed banking system renowned less for its professionalism and prudence and more for its inefficiency, corruption and mis-management. Private banks in India are facing huge problems too. Many of them have corporate governance issues, big bosses of some of these banks have recently fallen on their swords. Banks are not the only financial institutions in trouble.

In India, the Non-Banking Financial Company (NBFC) has emerged as a strong entity in recent years. Stocks of NBFCs had been going up for the last few years. Thanks in part to high oil prices and a crashing rupee, these stocks have now plummeted and the NBFC party is over. This has a spillover effect on the banks because they were betting on NBFCs.Over the last 5 years, there has also been a hike or increase in tariffs on electronic products, including parts and components.

This hurt the activity of assembly and processing. Even though duties on imports of inputs or goods or material into exports are reimbursed, they do hurt production for the domestic market too, most often needed for reaching the minimum scale of production after which exports can begin.

Other Reasons For The Financial Crisis:

First, the irrational exuberance that affected much of the world in the mid2000s also touched India. Secondly, demonetization and the introduction of the Goods and Services Tax (GST) has put businesses under great strain. Third, the government must not only regulate banks better, and there are many more reasons.

How can India overcome the financial crisis? By Aggressively selling 50-60 public undertakings (PSUs) and direct funds regard to the National Investment and Infrastructure Fund (NIIF). Ensure that the Air India sale does not get stalled. *Take off all labor laws and employees' provident fund (EPF) requirements for micro, small and medium enterprises (MSMEs).