Bank leaks have to be plugged.

Public sector banks are busy restructuring debt to hide the amounts of bad loans. They have extended the period for repayment, converted loan into equity or given new loans to cover the old ones. However, about 20% of restructured loans turn bad as companies cannot or do not repay them. Even some home loans are beginning to turn sick which is unusual in India because a large part of the price of any residential property is paid in cash, or black money, so the owner will cut every expense but continue to pay monthly EMIs to prevent foreclosure. The weak economy has reduced profits and high interest rates increase cost of loans leading to financial distress for companies. But a big reason is that loans are issued by bank officials in return for expensive gifts or on instructions from politicians. Regulators have turned a blind eye to this cozy relationship which has resulted in rising bad loans for public sector banks. Many used loans to invest in the real estate sector where rapidly rising prices meant that profits could be multiplied in the shortest possible time. Land was acquired through political influence and apartments were sold at inflated costs. Taxpayers and investors lost out. Alarmed at the rising levels of bad loans the government and the Reserve Bank have been exerting pressure on banks to clear up their books. Banks, in turn, are turning the screws on companies which are finding it difficult raise funds. In desperation some are resorting to raising money from abroad but without adequate hedging against currency fluctuation, expecting the Reserve Bank to keep the exchange rate steady at current rates. According to one study one in four of the top 500 companies could come close to defaulting on their debt in the next 5 months. A lot depends on what the Federal Reserve does next year, which depends on the direction of the US economy. In the US profits are beginning to rise, jobs are being created again and the stock market is booming. On the other hand 10-year bond yields continue to be low, showing that the market expects inflation to remain soft for a long time to come. Since inflation is linked to increasing demand, which is created by rising wages in a growing economy the markets seem to suggest soft growth in the near future. We will know in the coming months. If interest rates start to rise in the US money may flow out of India leading to a fall in the rupee exchange rate which will raise inflation by raising the cost of imports, especially oil. Some expect the economy to grow strongly and are calling for interest rates to be cut by 100 basis points to stimulate growth but there maybe pitfalls ahead. There should be a law on how much a company may borrow.