MUMBAI: Public sector banks should not be nudged to lend in order to pump up the economy even as the government finds little fiscal headroom, former RBI governor Urjit Patel warned in his first public engagement since quitting his post last year.
It could lead to a vicious cycle of higher NPAs, and continued capital infusion by the government adds to fiscal deficit and sovereign liabilities, Patel warned. “After fiscal dominance over monetary policy, are we looking at fiscal dominance over banking regulation?” Patel asked speaking at Stanford University on June 3.
What Patel said is significant in light of the circumstances that led to his exit – a government desperate to improve liquidity and aid growth was at loggerheads with Patel, who was unrelenting on monetary policy goals and help in putting a tight leash on NPA resolution.
It is not possible to have PSB dominance in the banking sector, retain independent regulation and adhere to debt-GDP targets; calling it a trilemma the government and regulator faces, he said that “all three are not feasible on a durable basis”.
“Temptation to reset back to the past should be eschewed. Episodic concerns for stability? Possible if there is foot-dragging, or, worse, back peddling, and the concomitant delays,” Patel said after presenting a ringside view of the banking sector in a 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, known for not mincing his words, said there are no short cuts, and that sweeping the problem under the carpet won’t work. It will only delay the unlocking of capital and come in the way of financing future investment efficiently, he said.
Making his presentation before the June 7 RBI circular on stressed assets (a modified version of the contentious February 12 circular introduced during his tenure) was issued, Patel cast doubts if “extend & pretend” culture of debt restructuring would come back. Will, there be a weakening of IBC (Insolvency and Bankruptcy Code), Patel asks, after detailing the delays in banks taking up resolution and borrowers “gaming” the system.
“How did we get there? Plenty of blame to go around! Prior to 2014, all stakeholders failed to play their role adequately” Patel said about the high NPAs that got built up, and the low capital scenario. Pointing to the “scaffolding” that has been built up since 2014 from setting up of the credit registry, asset quality review, IBC, etc, Patel said RBI got rid of the “alphabet soup” debt-restructuring, with the February 12 circular putting an end to “extend and pretend” syndrome of banks.