Former Reserve Bank of India governor Urjit Patel has warned against the temptation to deploy public sector banks to kick-start growth via mass-scale lending without proper regulations, as it has the potential to flare up the non-performing asset (NPA) situation again.
According to Mr Patel's presentation to the Stanford University's 19th Annual Conference on Indian Economic Policy, Temptation to reset 'back to the past' should be eschewed.
"Short-cuts or sweeping the problem under the carpet is unlikely to work; will only delay unlocking of capital, and come in the way of financing future investment efficiently," he said.
Mr Patel said the process of kick-starting the growth cycle by nudging government-owned banks to pump-prime the economy has the ability to culminate into "a vicious cycle". He said that as the "government's headroom for running higher fiscal deficits is exhausted, GBs (government-owned banks) are nudged to (over) lend to pump-prime the economy or boost preferred sectors".
"But this leads to higher NPAs over time, which requires equity infusion from the government, and this eventually adds to the fiscal deficit and sovereign liabilities in due course, anyway."
In the presentation, Mr Patel blamed stakeholders such as the government, lenders and regulators for failure to play their role in checking the NPA situation. "Plenty of blame to go around! Prior to 2014 all stakeholders failed to play their role adequately," he said.
Mr Patel served as the 24th Governor of the Reserve Bank of India from September 2016 to December 2018.
He said that banks applied "very little risk analysis and management in sifting good from bad assets.
On the regulator's part, Mr Patel said it should have acted earlier on the issue, whereas the "government did not fully play its role as principal shareholder and manager of economy's health, he said in his presentation.
Besides, he pointed out that the present level of bank capital masks the future expected capital write-offs. "Provision Coverage Ratio for Indian banks is much lower despite the loss, given that default is considerably higher in India," his presentation said.
"High net NPAs compared to other countries implies that current headline capital adequacy is, in effect, overstated."
Mr Patel's presentation pointed out that in Indian banks, capital is low relative to NPAs when compared to global standards.