scorecardresearch

Banking sector facing financial instability: Ex-deputy RBI governor Rakesh Mohan

Mohan says there is a mismatch between the performance of the real sector and financial markets. RBI this month revised its real GDP projection from 10.5 per cent to 9.5 per cent in 2021-22 amid second Covid-19 wave

RBI last month said the Covid second wave impact is not as bad as the first wave RBI last month said the Covid second wave impact is not as bad as the first wave

Former Indian central banker Rakesh Mohan has said the banking sector is staring at financial instability. Mohan, who served as the deputy governor of the Reserve Bank of India twice between 2002 and 2009, said the RBI has taken measures to boost credit flow but the overall growth in loans have been sluggish, excluding those disbursed to small-and-medium-sized businesses.

"There is a mismatch between the performance of the real sector and financial markets. This could potentially lead to enhanced stresses experienced by both lenders and borrowers, leading to potential financial instability," Mohan told Bloomberg.

The country has the biggest piles of soured credits among big economies, and is staring at a crisis in shadow banking, the publication reported, adding that the Indian banks, however, will withstand the impact of the second Covid-19 wave.

Also read: RBI keeps repo rate unchanged; maintains accommodative stance

The provisioning and additional measures being taken by the RBI will allow lenders to hide the true extent of bad loans damage in FY22, it said. The Reserve Bank of India (RBI) this month revised its real GDP projection from 10.5 per cent to 9.5 per cent in 2021-22 amid the second wave of Covid-19 and localised lockdowns.

In its annual report released last month, the RBI said the impact of the Covid second wave is not as bad as the first wave, but said that surrounding uncertainties remain.

Also read: RBI MPC meet: GDP growth expected to be 9.5% in FY22

"The prospects for the Indian economy, though impacted by the second wave, remain resilient, backed by the prospects of another bumper rabi crop, the gathering momentum of activity in several sectors of the economy till March, especially housing, road construction, and services activity in construction, freight transportation, and information technology," the annual report said.

Also read: India's forex reserves may have crossed $600 bn, says Governor Shaktikanta Das