Bank Nationalization and its reforms in India

  • Dr. Rejimon P.M. Assistant Professor in Economics & Research Guide, Calicut University, Kerala.


Capital is the lifeblood of a modern economy. Traditionally, capital was the money that was saved and lent. But in modern banking, with fractional-reserve lending, banks can create capital digitally out of thin air. This increased availability of capital helps economic growth, but if not properly managed, it can be disastrous. Economist Hyman Minsky blamed excessive debt for most financial crises. He identified three types of debt. The safest debt, which he called ‘hedge financing’, is responsible for creating economic growth. The borrower invests capital in productive economic activities, from which cash flows can service the interest and eventually pay off the principal. A riskier debt, called ‘speculative financing’, involves credit to marginal businesses—often forced by the government through priority-lending schemes—where current cash flows are sufficient only to pay the interest, and the principal has to be rolled over to a later date. Sometimes that works out, but an economic downturn exacerbates the risk of default. The third kind of debt, which Minsky called ‘Ponzi financing’, was most dangerous because borrowers use the capital not to invest in productive activities, but to buy assets hoping to flip them at a higher price, repay the debt, and book a profit. This paper simply analyse the banking nationalization and its sector reforms in India. Key Words:-Bank Nationlization, Non-Performing Assets, Financial Crisis


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