How to enable a bank collapse

Halfway through the economic liberalisation program by the Narasimha Rao government in 1995-96, the Indian Bank losses mounted to ₹1727 Cr. Wiping out its entire capital base. Over the next couple of years, the losses multiplied, as bad loans reached 40% of its loan book.

Other banks like UCO and United Bank of India too had piled up bad loans, given the inherent weakness in their region, with many cyclical industries going through trouble and operational inefficiencies. 

By the time Vajpayee led NDA government came to power in 1999, the government had sunk a total of ₹6750 Cr in the form of capital in them.

For the government struggling with finances and with global slowdown, pouring in more capital wasn't an option. Nor was shuttering the banks, given the political sensitivities.

Then RBI governor, Bimal Jalan formed an advisory group with ex-chairman of SBI as its head. The advisory group didn't recommend any closure, merger or privatisation of these banks. Instead, operational changes were recommended like reducing operational cost, resolving bad loans, induction of technology etc.

The efforts paid off and by 2001-02, these banks were back to reporting modest profits. It helped that the indian government provided capital to Indiam bank, and as interest rates fell sharply during that period, many banks including weak ones were able to gain on the portfolio of bonds on their books.