Mumbai: Failures of the central bank, the government and state-run lenders in the years till 2014 sparked India’s bad loan crisis, former Reserve Bank of India (RBI) governor Urjit Patel said, while putting up a strong defence of the actions of RBI under his watch.
In a presentation at Stanford University’s annual conference on Indian economic policy that touched upon bad loans, bank regulation and bankruptcy resolution, Patel warned against sweeping problems under the carpet, as it would only delay unlocking of capital and scuttle financing of future investments.
In the speech—Patel’s first since quitting RBI in December amid a confrontation with the government over several policy issues—he said the central bank should have acted earlier by ensuring that state-run banks followed stringent risk management processes.
Instead of installing adequate risk controls, Patel said the government encouraged state-run banks to over-lend to boost growth, leading to a jump in non-performing assets (NPAs), forcing higher equity infusion from the government and consequent pressure on the fiscal deficit.
Patel also said India’s state-run banks have the highest net NPAs worldwide and their capital levels were overstated. “How did we get here? Plenty of blame to go around! Prior to 2014, all stakeholders failed to play their role adequately,” he said.
Coincidentally, the presentation, released just a day ahead of the Union budget, was made just two days before RBI’s bimonthly monetary policy on 6 June. In the budget, the first in the second term of the Narendra Modi government, finance minister Nirmala Sitharaman is expected to announce further recapitalization for state-run banks.
The government has already pumped ₹2.1 trillion into public sector banks since September 2017. According to ratings agency Icra Ltd, banks will require a further ₹35,000-45,000 crore to support domestic credit growth of 12-13%.
According to Patel, the government and RBI face a trilemma: it is not possible to have dominance of public sector banks, retain independent regulation and adhere to public debt-GDP targets, all at the same time.
“After fiscal dominance over monetary policy, are we looking at fiscal dominance over banking regulation now?” Patel said. Fiscal constraints, he said, were forcing the government to use the banks it owns to over-lend and pump-prime the economy.
Patel also defended RBI’s controversial circular issued on 12 February 2018 on loan restructuring framework, and the move to bring 11 public sector banks under the prompt corrective action.
He pointed out that fresh bad loan slippages had declined after the circular was released.
The circular, which prescribed rules for recognizing one-day defaults, was struck down by the Supreme Court later, which said it was beyond the scope of RBI’s powers.
Patel also defended RBI’s decision to instruct banks to initiate insolvency proceedings against large defaulters. He said the failure of banks to take action was undermining the credibility of the Insolvency and Bankruptcy Code, forcing RBI’s hand.