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Former RBI governor Urjit Patel says before 2014, RBI and government was slow in tackling bank crisis

Patel was invited at Standford University where he spoke about the areas of concern for the country's banking sector including high non-performing assets (NPAs) especially at state-run lenders, and current capital buffers being "overstated" and insufficient to tackle the huge stress.

In his first remarks after resigning from the position of governor of Reserve Bank of India (RBI), Urjit Patel held banks, government and the RBI responsible for the spiraling crisis of bad loan mess and the following low capital buffers till 2014. Patel asserted the banks indulged in over-lending and the regulator (RBI) should have acted sooner to reduce the magnitude of the current NPA crisis.

Patel was invited at Standford University where he spoke about the areas of concern for the country’s banking sector including high non-performing assets (NPAs) especially at state-run lenders, and current capital buffers being “overstated” and insufficient to tackle the huge stress. He said, “There are multiple stakeholders responsible for the position we are in right now. Prior to 2014, all stakeholders failed in playing their role adequately. Banks, the regulator, and the government.”

After Narendra Modi came into power in 2014, Patel was appointed as the governor of RBI in 2016, and he had kickstarted asset quality review that led to the recognition that system was reeling from hidden stress. The introduction of bankruptcy laws was one of the moves to assuage the lurking stress. Patel contended these actions profoundly impacted the bank’s ability to fund the demands of the economy, where growth had been slumping.

Patel recommended the current government to stay on the course and enforce tough decisions in the face of difficulties. “Temptations to reset ‘back to the past’ should be forsaken, ” he urged. In addition, he cautioned that “episodic concerns” on stability are possible if there is “foot-dragging, or, worse, back-pedaling”. He also emphasized that short cuts and hiding the problem for future remedy will be futile and will only dealy unlocking of capital, and act as an impediment in the way of financing future investment efficiently.

Regarding NPA issue Patel said, “Matters related to ever-greening the NPA problem may surface again. Banks may be inclined to delay their decision making leading to the reemergence of the NPA crisis.”

He also aired his disappointment about the enforcement of the insolvency and the bankruptcy code, asserting it has “thrown up a worrying number of exceptions” and signs of “gaming” are evident as several major cases are held beyond the 350-day resolution window.

Speaking on the recent measures of forcing bank consolidation by the government, Patel voiced concern suggesting such mergers have “eroded” the value of the entity taking over weaker banks and called IDBI Bank a “highly problematic” organization, which was thrust upon LIC. He also added that the public sector banks have a high ratio of non-operating expenses to their earnings as compared to their private counterparts.

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