MUMBAI, July 4:A failure on the part of banks,
the Government and the regulator till 2014 has got us into the
current bad loan mess and the resultant low capital buffers,
Urjit Patel, the past Reserve Bank Governor, has said, asking
all to resist the temptation of going back to the status quo.
In his first comments after resigning as RBI governor
on December 10 last year amid sharp differences with the
government, Patel said banks indulged in over-lending, while
the government did not “fully play” its role, and also
conceded that the regulator should have acted earlier.
Speaking at an event in Stanford University on June 3,
Patel listed out areas of concern for the country’s banking
sector, including high non-performing assets (NPAs) especially
at state-run lenders, and current capital buffers being
“overstated” and being insufficient to tackle the huge stress.
“How did we get here? Plenty of blame to go around!
Prior to 2014, all stakeholders failed to play their role
adequately. Banks, the regulator and government,” he said in
the presentation.
It can be noted that after 2014, which saw a change of
guard in government and also Patel’s predecessor Raghuram
Rajan assuming charge, the RBI started an asset quality
review, which led to the recognition of the huge pile of
hidden stress in the system and resolution through the
introduction of bankruptcy laws.
These actions led to a sharp decline in banks’ ability
to fund the needs of the economy, where growth has been
sagging.
Patel, who spent over five years at the RBI, including
his role as the deputy governor, advised to stay on the course
even in the face of difficulties.
“Temptation to reset ‘back to the past’ should be
eschewed,” Patel said, adding that “episodic concerns” on
stability are possible if there is “foot dragging, or, worse,
back-pedalling”.
“Short-cuts/sweeping the problem under the carpet is
unlikely to work; but will only delay unlocking of capital,
and come in the way of financing future investment
efficiently,” he warned.
In the presentation a copy of speech was not
available Patel also said, “After fiscal dominance over
monetary policy, are we looking at fiscal dominance over
banking regulation now.”
Patel said an asset quality review for the non-banking
finance companies is “inevitable” given their
interconnectedness in the financial system.
On the Supreme Court striking down the controversial
February 12, 2018A circular, which was also a major bone of
contention between him and the government, Patel said only
time will tell whether a system of “extend and pretend” will
make a comeback.
“Issues of ever-greening theA problem may emerge
again. Banks may drag their feet on decision making, viz.
delayed negotiations/taking haircuts for timely resolution
could come back to haunt the sector,” he warned.
It can be noted that four days after this presentation
at Stanford, RBI did come out with a revised framework after
being forced by the Supreme Court which struck down the
February circular.
Patel also went public with his disappointment with
the execution under the Insolvency and the Bankruptcy Code,
saying it has “thrown up a worrying number of exceptions” and
signs of “gaming” are visible as many of the major cases are
delayed beyond the 350-day resolution window.
He also sounded peeved at no divestment by the
government in joint ventures, special purpose vehicles and
asset management companies despite the equity markets overall
remaining quite buoyant.
Patel said social sector requirements and an inability
to access capital markets have resulted in the government’s
stake in many lenders going up as more infusions came from the
government despite fiscal constraints.
He also sounded disappointed at the recent government
forces bank consolidations, saying such mergers have “eroded”
the value of the entity taking over weaker banks and termed
IDBI Bank as a “highly problematic” entity, which was forced
on LIC.
Patel said the state-run lenders have high ratio of
non-operating expenses to earnings compared to their private
sector peers.
“High cost structure of government banks is borne by
the economy; may be impinging transmission of policy rate
changes,” he warned. (PTI)
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