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 status quo.
In his first comments after resigning as the RBI Governor on December 10 last year amid sharp differences with the government, Mr. Patel said banks indulged in over-lending while the government did not ‘fully play’ its role.
He also conceded that the regulator should have acted earlier.
Speaking at an event in Stanford University, Mr. Patel listed out the areas of concern for the country’s banking sector, including high non-performing assets (NPAs), especially with state-run lenders, and current capital buffers being “overstated” and 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, the RBI, under the governorship of Raghuram Rajan, started an asset quality review that led to the recognition of the huge pile of hidden stress in the system and an attempt at resolution through the introduction of bankruptcy laws.
Sagging growth
These actions led to a sharp decline in banks’ ability to fund the needs of the economy, where growth had been sagging.
Mr. Patel, who spent over five years at the RBI, including in his role as the Deputy Governor, advised stakeholders to stay the course even in the face of difficulties.
“Temptation to reset ‘back to the past’ should be eschewed,” Mr. 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.
On the Supreme Court striking down the February 12, 2018 circular, which was also a major bone of contention between him and the government, Mr. Patel said only time will tell whether a system of ‘extend and pretend’ will make a comeback.