Outgoing Reserve Bank of India (RBI) governor Raghuram Rajan, who has ruffled industry for his strident bid to get the bank balance-sheets cleaned up, on Tuesday admitted that the central bank should have carried out this exercise earlier.
“As with inflation, it was the duty of the central bank to press for bank clean-up earlier, when few among the public support the central bank’s activism,” he said, addressing the 10th Statistics Day conference at the RBI headquarters here.
He said the lenders were initially reluctant to implement the clean-up which started from December 2015 with RBI identifying 150 largest accounts which were facing problems in servicing their debt obligations.
“Fortunately, after an initial reluctance, banks have entered the spirit of the clean-up and some have gone beyond what was demanded of them,” he said, adding that it was “easy to ignore” the problem of loan losses hoping that it goes away “somehow”.
Rajan said however that the scourge of loan losses “had a tendency to increase, get too big to ignore, too late to manage, and push the system into crisis”.
In late 2015, RBI came out with a list of over 150 accounts, which was pruned to 120 later, and asked all the lenders to recognise their exposures to those as non- performing assets or bad loans.
It gave banks two quarters to recognise the losses and according to some estimates, the banks have taken a hit of Rs 70,000 crore to cover for the reverses.
Following this clean-up order, the banks, led by state-run ones, have reported close to 14%, or over Rs 8 lakh crore, of their assets as stressed as of March 2016, while NPAs alone crossed 7.6%.
The Reserve Bank had last month warned in the financial stability report that the NPA pains might worsen and that it would cross 8.5% by March 2017 under its base case scenario.
On inflation, Rajan said the criticism that RBI killed growth with high rates was at odds with “received wisdom” of India being fastest-growing and urged the government to look beyond ”motivated criticism” to protect the central bank’s autonomy.
He also rejected the argument that inflation has come down largely because of “good luck” stemming from low oil prices and not because of RBI’s monetary policy measures, saying a significant part of decline in global prices has not been passed on domestically as the government has hiked excise on petrol and diesel.
Rajan, who has decided against a second term amid a spate of attacks including some of personal nature, rejected the criticism that he has kept the monetary policy “too tight” and blamed the slowdown in credit growth largely to stress in the public sector banks, stemming from “past mistakes in lending”.
He also appeared to blame “over-leveraged promoters” for voices against the clean-up at banks and said “some public sector bank CEOs with a short remaining tenure would prefer not taking stern action and recognising NPAs” as they might “prefer transferring any problems to their successor”.
He also said that investors in bank shares do not welcome disclosures of loan losses initially, while “depositors, knowing the government stands fully behind PSU banks, are rightly unperturbed by the quality of bank balance sheets”. Rajan said high inflation has “pernicious effects” on the weaker sections and wondered why there was so “little anxiety” over the price-rise scenario.
“Without any political push back as inflation rises, it is necessary to build institutions to ensure macroeconomic stability…perhaps this is why successive governments, in their wisdom, have given the RBI a measure of independence,” said Rajan.
Hitting back at the critics who have blamed him for keeping rates too high and thus killing demand and growth while failing to even control inflation, Rajan said, “Critics offer two contradictory arguments on inflation”.
“On the one hand, they argue that we have killed demand and growth through high rates though this itself seems at odds with the received wisdom that we are the fastest growing large economy in the world.