Finance minister Arun Jaitley on Tuesday slammed the Reserve Bank of India (RBI) for “looking the other way” when “indiscriminate lending” took place between 2008 and 2014, causing a sharp spike in stressed assets led public sector banks (PSBs) to a prolonged, intractable crisis.
Jaitley’s unusual criticism of the central bank came days after RBI deputy governor Viral Acharya went public against the government’s bids to get some of the central bank’s policies tweaked and trim its powers, warning that attempts to undermine a central bank’s independence were ‘potentially catastrophic’ and would “sooner or later incur the wrath of financial markets”. Acharya, who hinted that his concerns were shared by governor Urjit Patel, also asserted that while governments were guided by ‘short-termism’, central bankers had “horizons of decision-making that tend to be longer, spanning election cycles”, in one of the most trenchant criticisms of government by an incumbent RBI functionary.
Speaking at an event of the US-India Strategic Partnership Forum, Jaitley said, “During 2008-14, after the global economic crisis to keep the economy artificially going, banks were told to open their doors and lend indiscriminately.”
“The central bank looked the other way. I am surprised that at that time the (UPA) government looked the other way, the banks looked the other way, I do not know what the central bank was doing. It was a regulator of these. They kept pushing truth below the carpet.”
Later in the day, the minister huddled together with Patel, Acharya and other top functionaries of the RBI for a scheduled meeting of the Financial Stability and Development Council (FSDC) where the top agenda was a perceived liquidity crisis in the NBFC space.
Bank loans surged an average of around 20% a year between 2008 and 2014. The finance minister said total bank credit rose from Rs 18 lakh crore in 2008 to Rs 55 lakh crore by 2014 — something both the banks and the borrowers could not sustain. Consequently, following the asset quality review (AQR) initiated in 2015 by the RBI, it was found that non-performing assets (NPAs) of banks stood at Rs 8.5 lakh crore, much higher than Rs 2.5 lakh crore assumed before that, he added.
The unprecedented level of NPAs, mostly concentrated with PSBs, prompted the central bank to follow a rigourous process of clean-up and ensure that adequate provisions are made by banks for the bad loans, which severely eroded PSBs’ capital base. Subsequently, 11 of the 21 PSBs (accounting for roughly 30% of the advances of all state-run banks) are placed under the central bank’s prompt corrective action (PCA) regime, aimed at nursing weak banks back to health by imposing certain tough conditions on them. These stressed PSBs, for their part, have found the conditions (two banks even face restrictions on lending) under PCA too stringent.
Acceding to PSBs’ demand, the finance ministry representatives on the RBI board last week raised the need to “align” the PCA norms with global best practices, among others. This added to the discomfiture of the central bank.
RBI had also put its dissent note over a government-panel’s proposal to have a payments regulator outside the central bank. Acharya has also denounced the centre’s oft-repeated demand for a much higher share of the RBI’s ‘surplus’. He has also called for greater powers for RBI to regulate PSBs.
Speaking at the UISPF event, Jaitley said reforms undertaken by the government have led to significant improvement in revenues. “My own estimate is that from 2014 to 2019, we will be almost very close to doubling our tax base,” he said. India had 3.8 crore income tax filers when the BJP government took office in 2014 and in four years, the base has widened to about 6.8 crore. “This year, I am sure it will be very close to 7.5-7.6 crore which is almost double (of 2014 level),” he said, adding the first year of GST implementation has raised the indirect tax assessee by 74%.
Source : PTI