Former Reserve Bank of India (RBI) governor Urjit Patel, who remained tight-lipped during his tenure, has come down heavily on the government and regulators. In a recent presentation at a conference in Stanford University, he said the government, RBI and banks failed to play their role adequately prior to 2014 in the regulation and administration of public-sector banks (PSBs).
This is the first time Patel has spoken publicly about the state of India’s banking industry since he resigned from RBI on December 10, 2018, amid differences with the government on a string of issues.
In a keynote presentation at the 19th Annual Conference on Indian Economic Policy at Stanford University, Patel said the regulator failed to acknowledge and rectify PSBs’ inability to identify poor performing assets and also to restructure and react quickly to improve recovery or cut losses in bank exposures to sectors such as iron and steel, aviation, power generation and real estate.
The former governor said RBI failed in gauging when extant assumptions were getting stretched and needed revision. It did not challenge assumptions through more rigorous stress-test scenarios at the bank level as well as sensitivity analysis on demand assumptions and policy risks. They also did not object to the scale of bank exposures, ask for slower expansion or tighten lending norms. The regulator failed to “take away the punch bowl from the credit-binge party. Instead, [it] allowed greater flexibility (eg company/group/NBFC exposure norms as % of banks’ net owned funds were adjusted upwards),” Patel said in his presentation.
As for the government, he said it did not fully play its role as the principal shareholder in PSBs and manager of the economy’s health. “Principal (dominant) owner didn’t question risk controls in GBs (government banks) even as it was receiving significant dividends,” the presentation said, adding that the government encouraged PSBs to help pump prime the economy for higher growth ‘under the guise of “capital deepening”, “sensitive sectors” etc! A number of PSBs did not have senior management in place, as a result of which governance suffered.
Banks applied very little risk analysis and management in sifting good assets from bad, were liberal with concentration ratios and ignored leverage at borrowing firms. “On average, board-level firewalls did not fulfil remit adequately,” Patel said.
He added that banks failed to maintain balanced credit growth, given that non-food credit growth over FY07-12 was around 20%, against a mere 7% growth in real gross domestic product (GDP).
India’s flagship bankruptcy legislation also came in for criticism from Patel. He noted that the Insolvency and Bankruptcy Code (IBC) has fallen prey to “easy gaming by defaulters”. In his conclusion to the presentation, Patel said, “Process for executing the IBC has thrown up a worrying number of exceptions.” He also defended the prompt corrective action (PCA) framework for its role in aiding convalescence of weak PSBs and admitted that commitment to it was “cut short”. Patel was critical of the court judgment of April 2, 2019, which struck down RBI’s February 12, 2018, circular as ultra vires and said it could result in slower resolution of stress.
“Effectively, a case-by-case approach for reference under the IBC and which may require permission of the government. (Key catalyst has been removed?),” he said in the presentation.