Urjit Patel resigned as the governor of the Reserve Bank of India on December 11, 2018. In his new book, Overdraft: Saving the Indian Saver, he gives some insights on what led to this unprecedented resignation.
The book delves deep into the issue of non-performing assets, which has troubled the Indian banking system for over a decade, and looks at how state-owned banks themselves may have been responsible for their deteriorating financial condition. At the same time, Patel does not shy away from blaming the RBI for failing to identify the bad loan problem earlier.
“The regulator fell short on several counts in the period leading up to 2014. It failed to challenge assumptions through, for example, more rigorous stress-test scenarios at bank level as well as sensitivity analysis on (demand assumptions) and sector (policy) risks,” he writes.
The Union government passed the Insolvency and Bankruptcy Code (IBC) in 2016, which Patel notes was universally acknowledged as a “landmark reform”. Then, on February 12, 2018, the RBI issued a stringent framework for stressed assets regulation. “Weak credit discipline in banks... has been one of the main bank-specific factors in the build-up of stressed assets,” he writes.
The IBC and the February 2018 circular have helped banks resolve several large stressed assets and recover sizeable amounts of money. However, Patel’s anguish over the stakeholders going slow after the initial success is evident. He suspects “the government may have felt that the deterrence effect of the IBC had been achieved, and resolute follow-up to help complete the task was, therefore unwarranted.” A few quotes aside, there are no lengthy conversations between him and the finance minister detailed in the book, which would have shed more light on the government’s role.
The most glaring omission in the book is the absence of a discussion on demonetisation. Patel was RBI governor when the Modi government implemented the policy, and he received a lot of flak for remaining quiet, back then. But he continues to remain silent on the issue.
The book comes at a time when India is hard hit by the Covid-19 pandemic and banks are staring at a massive impact on their balance sheets and rising NPAs. Patel warns the banking sector to be careful: “We have to be vigilant that U-turns don’t usher a serial bout of ever-greening and zombie borrowers; otherwise victory over crony capitalism will, at best, be short-lived, and that the limited progress so far could turn out to be a false dawn.”
Overdraft: Saving the Indian Saver
By Urjit Patel
Publisher: HarperCollins Publishers India
Pages: 248; price: Rs 534
