Urjit Patel blames banks, RBI, govt for India's NPA problem

According to the former RBI governor, gross NPAs in India are at 10.3 per cent compared to 1.9 per cent in China, 3.2 per cent in Brazil and just 1 per cent in the US

According to Former RBI governor Urjit Patel, the quantum of bank frauds has quadrupled in the five years since 2013-14. What's more, he claims that "as many as 90 per cent of frauds" occurred in government-owned banks (GBs) while the share of private banks (PBs) is only about 10 per cent. Speaking at the 19th Annual Conference on Indian Economic Policy, held at Stanford University over June 3-4, he blamed all the stakeholders - be it banks, the regulator or the government - for this state of affairs, saying that all three failed to play their role adequately prior to 2014. Patel had assumed charge of the apex bank in September 2016 after serving as Deputy Governor since January 2013.

In a 40-slide presentation titled "The cul-de-sac in Indian Banking: A dominant government sector, limited fiscal space and independent regulation (Is there an "impossible trilemma"?)", Patel blamed his predecessors for not taking away the "punch bowl" from the "credit-binge party" as well as failing to acknowledge and rectify GBs' inability to identify poor performing assets and reacting quickly to cut losses. According to The Times of India, this was Patel's first speech since resigning as RBI governor last December.

The regulator also failed to understand that the assumptions being made by the banks on revival of stressed businesses were going awry. These assumptions needed to have been challenged by doing stress tests on banks and sensitivity analysis on demand assumption and on policy risks to sectors. "Instead [the regulator] allowed greater flexibility, for example company/group/NBFC exposure norms as a percent of banks net-owned funds were adjusted upwards," said Patel.

The banks themselves were at fault for inadequate risk management policies and over-lending, he said. Moreover, they failed to maintain balanced credit lending growth - Patel pointed out that non-food credit growth between FY07 and FY12 was around 20 per cent while the real GDP growth rate was around 7 per cent.

On the other hand, he blamed the government for not questioning risk controls in GBs even as it was receiving significant dividends. In fact, according to him, the government encouraged GBs to help "pump prime the economy" for higher growth under the guise of "capital deepening" and sensitive sectors.

"In recent years, NPAs in India have been one of the highest amongst major economies; inducing a negative risk perception," he said in his presentation, highlighting that much-needed reform continues to evade the GBs. He alleged that senior positions in the state-run banks were not only "routinely" left vacant and board seats unfilled, but their dual regulation - by the RBI as well as the government - also remains to be addressed.

Let's not forget that the topic of the recently resigned RBI Deputy Governor Viral Acharya's October 26 speech, which focussed on the importance of independent regulatory institutions, had reportedly been suggested by Patel himself. This was the speech that had exposed the deep rift between the RBI and the government to the public.

In his damning slides, Patel cited data to show how bad loans have hollowed out the capital of PSBs - which have not provided enough for potential losses - while the government's response has been to throw more capital at the banks. Since 2010, government holding in public sector banks has reportedly increased, driven mostly by the need to push social objectives such as Mudra schemes, 59-minute loans for SMEs and universal bank accounts. SBI is the only lender where government stake has declined marginally from 59 per cent to 58 per cent, whereas in most cases the government has increased its stake by as much as 25 per cent.

According to Patel, gross NPAs in India are at 10.3 per cent compared to 1.9 per cent in China, 3.2 per cent in Brazil and just 1 per cent in the US. Only Italy and Russia fare worse than us among the major economies. Besides high NPAs, Indian banks lag their global peers in making provisions towards these bad debts. He pointed out that the buffer for NPAs, including the provision coverage ratio and recovery rates, adds up to 77 per cent in India, which is the lowest among all major economies. The "lack of a comprehensive legal framework" has led to "easy gaming by defaulters". His presentation also touched upon the limitations of the Insolvency and Bankruptcy Code.

In his concluding remarks, Patel claimed that though a "coherent policy scaffolding" has been constructed over 2014-2018, the "trilemma" that the government and the RBI face is that it is not possible to have dominance of GBs in the banking sector; retain independent regulation and adhere to public debt-GDP targets. "After fiscal dominance over monetary policy, are we looking at fiscal dominance over banking regulation?" he posed.

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