No fast action, the government’s reaction caused the problem of bad credit: Urjit Patel

MUMBAI: The problem of Indian bad loans slowly turned into a full crisis due to the lack of timely action by the regulator and the government for several years until 2014, and is mostly governed by state banks, said former central bank governor Urjit Patel.
In his first public appearance, Dr. Patel held a presentation at the annual Stanford University Annual Economic Policy Conference on June 3 and 4, from his central bank’s office as Governor in December.
His presentation, which touched upon a number of issues, including bad loans, bank regulation and a bankruptcy ruling, was announced at the end of Thursday at the university.
State-owned banks are also threatened by the increasing frequency of fraud due to poor operational risk management and internal audits, said Dr. Patel.
“The high level of net non-performing assets compared to other countries implies that the current main capital adequacy is, in fact, overstated,” he added.
Banks and financial institutions in the country have a bad debt over Rs. $ 10 trillion ($ 150 billion) and this has affected their ability to lend and boost economic growth.
About 90% of fraud cases occurred in state banks, Dr Patel said in his presentation.
“Government banks are encouraged to (via) lend pumps to the economy / encourage the desired sectors, but this leads to larger NPAs over time, which requires government infusion, which ultimately increases fiscal deficit and sovereign liabilities (eg, due to accountability repayment of bonds) in due time, in any case, “said Dr. Patel.
“Culmination is a vicious circle: since the government’s space to run (even) a higher fiscal deficit (practically) is exhausted,” said the 24th Governor of the Indian Reserve Bank (RBI).
In a presentation of the 2019/20 union budget on Friday, Finance Minister Nirmala Sitharaman said the government would reduce the country’s fiscal deficit to 3.3% from the interim budget target of 3.4%.
“How did we get here? It’s a lot of blame for that. Before 2014, all stakeholders failed to play their role adequately,” said Dr. Patel.
Regulators should have acted earlier, and failed to measure when existing assumptions are stretched and necessary revisions. He also blamed the government for failing to play its role entirely as the main shareholder and manager for the health of the economy.
Dr Patel, however, defended the IRB’s actions at the forefront, including high fines and management restrictions imposed on banks due to insufficient reporting of NPAs and breach of regulations.
“The government and the regulator face the trilem: It is not possible (i) to have dominance over government banks in the banking sector (ii) to maintain independent regulation and (iii) to respect the goals of public debt-GDP,” said Dr. Patel.

Sharing is caring!