ISAS Insights

The context of financial liberalisation in India was the inefficiencies created by the government's control of prices and quantities in the financial markets. One alleged legacy has been the stockpiling of non-performing assets in connection with funds requisitioned for given sectors. Here, as well as elsewhere, more discrimination must be exercised in passing judgment. In Appendix Table III.29 (A) of the Report on Trend and Progress of Banking in India 2006-2007 by the Reserve Bank of India, 2007, it is stated that non-performing assets of public sector banks are 60 percent in connection with the priority sector, and 40 percent in connection with the non-priority sector. Reform has meant the cautious relaxing of these constraints. The recent worldwide conflagration has brought to the fore the inherent fragility of financially sophisticated economies. The dynamics of modern economies is written by real-financial couplings. Over good times, conservative postures give way to excessive risktaking. Financial innovations abound, securitisation being a recent illustration. At some time during the euphoric upswing, the correspondence between securities and the underlying assets is called and then a downward cascade results. In the case of developing countries as well, the link between financial liberalisation and crises is quite robust.