Explained: How to solve the financial sector's capital shortfall

Given that PSBs account for 90% of the shortage, a credible divestment plan would reveal some well-capitalised suitors among private banks

If there were to be macroeconomic stress that results in a 40 per cent correction to the global stock market over the next six months, would India’s financial sector be able to survive and continue to provide efficient intermediation to the real economy?

The answer to this question depends upon the level of equity capital in the financial sector’s balance-sheet relative to its non-equity liabilities, factoring in the impact of equity losses that are likely to arise in such a “stress test”.  

Why the focus on equity capital? The reason is that only well-capitalised banks and non-banking financial companies (NBFCs) have incentives