In his first address after resigning as the RBI governor in December 2018, Patel said prior to 2014, all stakeholders -- banks, RBI and government -- failed to play their role adequately.

Former RBI Guv Urjit Patel says timely measures werent taken for Indias bad loan mess
Money Banking Thursday, July 04, 2019 - 16:58

Nearly six months after resigning as the governor of Reserve Bank of India (RBI), Urijit Patel has spoken up, listing out areas of concern for the banking sector of the country.

Speaking at an event in Stanford University on June 3, Patel said that failure on the part of banks, the government and the regulator till 2014 is what has gotten the country into the current bad loan mess and the resultant low capital buffers.

“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 his presentation.

Patel said that banks indulged in over-lending, while the government did not fully play its role as the principal shareholder and manager of the economy’s health.

He also admitted that the RBI failed to acknowledge and rectify inability of government-owned banks to identify NPAs and restructure and react to improve recovery or cut losses. According to him, the RBI failed to limit the scale of exposure to certain sectors and should not have allowed greater lending flexibility.  

"After fiscal dominance over monetary policy, are we looking at fiscal dominance over banking regulation now,” Patel said, adding that an asset quality review for the non-banking finance companies (NBFCs) is inevitable given their interconnectedness in the financial system. 

Patel said that the government failed to question risk controls at public sector banks before 2014 even as it was receiving significant dividends. Instead, it encouraged them to help pump in more capital.

Speaking of the Indian Bankruptcy Code (IBC), Patel said that a lack of comprehensive legal framework led to easy gaming by defaulters.

“India has multiple laws that governed various facet of a corporate rescue and/or insolvency process without having a comprehensive legal framework that envisages a holistic process applicable to troubled or defaulting companies,” he said in the presentation.

According to Patel, banks were not forthcoming with required action in respect of large stressed accounts. He also said that signs of "gaming" are visible as many of the major cases are delayed beyond the 350-day resolution window. 

He also showed disappointment at the recent bank consolidations, saying that they eroded the value of the entity taking over weaker banks. He also called IDBI Bank merger into LIC highly problematic.

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