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    India must not neglect bank recapitalisation despite pandemic, says Viral Acharya

    Synopsis

    "If the government doesn't wish to recapitalise banks in a timely manner, then it must ensure that the contours of debt moratoria and forgiveness package aren't so generous that banks won't be in a position to lend well during the recovery phase, which is likely around the corner," Acharya said.

    Designing moratoria and forgiveness like farm-loan waivers that favour borrowers excessively in the short term has been detrimental to a sound recovery of credit growth in the medium term, Acharya said.
    MUMBAI: India is neglecting bank recapitalisation as it focuses on debt moratoriums and interest waivers for borrowers amid the COVID-19 pandemic, a former central bank official told Reuters on Monday.

    Indian banks are saddled with over $120 billion in bad debt, and in severely stressed conditions the bad-loan ratio could nearly double by March, according to Reserve Bank of India projections.

    Restoring banks' capital is critical for aiding a meaningful recovery, but there has been little focus on the matter, former RBI Deputy Governor Viral Acharya said.

    "This lack of focus is tantamount to kicking the can down the road and jettisoning financial stability for short-term gains," said Acharya, who recently wrote a book titled the "Quest for Restoring Financial Stability in India".

    "This repeated mistake has prevented India from recovering well from adverse shocks," Acharya said. His comments came weeks after India offered to waive the compounded interest component on all loans up to 20 million rupees following a legal challenge to the terms of a six-month moratorium.

    Designing moratoria and forgiveness like farm-loan waivers that favour borrowers excessively in the short term has been detrimental to a sound recovery of credit growth in the medium term, Acharya said.

    Though the latest one-time restructuring package has been fine-tuned to ensure it cannot be misused, it still has a little bit of a "band-aid and short-termism" approach to it, he said.

    Funds to provide for the losses that would be incurred through restructuring should be set aside so that banks do not strangle growth as the economy begins to recover after the pandemic.

    "If the government doesn't wish to recapitalise banks in a timely manner, then it must ensure that the contours of debt moratoria and forgiveness package aren't so generous that banks won't be in a position to lend well during the recovery phase, which is likely around the corner," Acharya said.

    "It would be good to learn from the past mistakes and start the work of repairing bank balance sheets at the same time as giving a soft landing to bank borrowers and the real economy.
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    19 Comments on this Story

    User41 days ago
    What Next? The Answer is very Global Leaders should come together open the economy, stop work from home concepts, stop counting corona , speed up Vaccine , support MSME and support spending
    Shyam Sunder42 days ago
    It was Raghuram Rajan who looked the other way during his term as CEA, when the UPA forced the public sector banks to lend to their favoured industrialists including people like Vijay Mallya. This was because he was indebted to Chidambaram but not to the nation. When he became RBI governor, he immediately opened the can of worms because he knew where they were and became the James Bond of economics. What a crook! Now his protege is talking about capitalising highly indebted banks. Where does he think the money will come from from? The same guys first said that it is a demand side problem, therefore put more money in the hands of the consumers. Now he talks about supply side problem wants the banks to lend indiscriminately. He should first make up his mind before talking.
    Sai Narayan42 days ago
    I will say do the opposite use bank finances which are idling anyway to lend like crazy after the pandemic is over. Lend to big companies private listed and PSUs that have a track record of profitability and filing SEC reports. Make these loans available at rates prevalent in international markets not more than 3.5 percent with a super long gestation period. The loans will be for specific uses like building roads, rail, airports, defense, cold storage etc and project progress and cash flows be monitored using big data and AI tools. Lend even if 10 percent goes bad, he remaining 90 percent will revitalize the Indian economy. Dont be miserly in lending if you want the Indian economy to grow. Dont listen to experts if there are bad debts simply print notes and carry on like the West and our East Asian neighbours did dring their crisis
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