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Periodic bail outs for state-run banks necessary, says Urjit Patel

Patel said banks indulged in over-lending, while the government did not "fully play" its role.

, ET Bureau|
Updated: Jul 04, 2019, 05.53 PM IST
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Patel said the state-run lenders have high ratio of non-operating expenses to earnings compared to their private sector peers.
KOLKATA: Former Reserve Bank of India Governor Urjit Patel has raised red flags over the capital position of Indian banks which he says is probably inflated given the high net bad loans. In a presentation at the Stanford University he said that periodic bail outs by the government or the LIC would be necessary as these state-run banks lose market share, which may after all be good for the system efficiency.

“It is possible that episodic high risk perceptions for the banking and financial sector as a whole will persist. Market perception is that the principal owner is one step behind regarding capital infusion into its banks due to fiscal constraints,” Patel said, speaking at the event on Indian Economic Policy in Stanford University on June 3.

Indian banks needed regular infusion of capital by the government to cover the erosion of capital due to losses on accout of bad loans. The banking regulator pushed banks to recognize the huge pile of hidden stress starting from 2014 and resolve corporate debt through bankruptcy laws. Patel urged stakeholders to resist the temptation to back-peddling.

In his first public speech after his premature exit from RBI in December last year after months of friction with the Narendra Modi government, Patel said that both the banks and the regulators had overlooked risk management processes while the governments prior to 2014 had encouraged banks to help pump prime economy for higher growth under the guise of capital deepening.

“As the government’s headroom for running higher fiscal deficits is virtually exhausted, state-run banks are nudged to over lend to pump prime the economy and 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,” he said.

In recent years, NPAs in India have been one of the highest amongst major economies, leading to erosion of financial sector health, “It could be that the funding model is gradually/grudgingly becoming more discerning now even as there has been intermittent concern over sector health,” he said.

Net non-performing assets for government-owned banks was 7.6% as on September last year while that was 1.7% for private banks.

“The supervisor had failed to acknowledge and rectify government-banks inability to identify poor performing assets; and restructure & react quickly to improve recovery and cut losses. The regulator failed in gauging when extant assumptions were getting stretched & needed revision,” the former RBI boss said.

Patel resigned from RBI on December 10 while his term was to end in September 2019.

His predecessor Raghuram Rajan started the asset quality review, the policy he continued with.

“Temptation to reset ―back to the past should be eschewed,” he said. “Short cuts/sweeping the problem under the carpet is unlikely to work and will only delay unlocking of capital, and come in the way of financing future investment efficiently,” Patel said.

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