SME Times News Bureau | 04 Jul, 2019
Former Reserve Bank of India Governor Urjit Patel said
that pushing public sector banks for mass-scale lending without proper
regulation may lead to a high non-performing asset (NPA) situation again.
In a presentation to the Stanford University's 19th
Annual Conference on Indian Economic Policy, Patel has warned against the
temptation to deploy public sector banks to kick-start growth via mass-scale
lending without proper regulations, as it has the potential to flare up the
non-performing asset (NPA) situation again.
According to the presentation, temptation to reset 'back to the past' should be
"Short-cuts or sweeping the problem under the carpet is unlikely to work;
will only delay unlocking of capital, and come in the way of financing future
investment efficiently," he said.
Patel said the process of kick-starting the growth cycle by nudging
government-owned banks to pump-prime the economy has the ability to culminate
into "a vicious cycle". He said that as the "government's
headroom for running higher fiscal deficits is exhausted, GBs (government-owned
banks) are nudged to (over) lend to pump-prime the economy or boost preferred
"But this leads to higher NPAs over time, which requires equity infusion
from the government, and this eventually adds to the fiscal deficit and
sovereign liabilities in due course, anyway."
In the presentation, Patel blamed stakeholders such as the government, lenders
and regulator for failure to play their role in checking the NPA situation.
"Plenty of blame to go around! Prior to 2014 all stakeholders failed to
play their role adequately," he said.
Patel served as the 24th Governor of the Reserve Bank of India from September
2016 to December 2018.
He said that banks applied "very little risk analysis and management in
sifting good from bad assets.
On the regulator's part, Patel said it should have acted earlier on the issue,
whereas the "government did not fully play its role as principal
shareholder and manager of economy's health, he said in his presentation.
Besides, he pointed out that the present level of bank capital masks the future
expected capital write-offs. "Provision Coverage Ratio for Indian banks is
much lower despite the loss, given that default is considerably higher in
India," his presentation said.
"High net NPAs compared to other countries implies that current headline
capital adequacy is, in effect, overstated."
Patel's presentation pointed out that in Indian banks, capital is low relative
to NPAs when compared to global standards.