Do ‘Whatever Is Needed’ To Recapitalise State-Owned Banks, Says NITI Aayog’s Rajiv Kumar
NITI Aayog’s Rajiv Kumar says RBI’s asset quality review that forced banks to recognise bad loans was a “bit harsh”.
NITI Aayog Vice-Chairman Rajiv Kumar said the Reserve Bank of India’s asset quality review that forced banks to recognise bad loans was a “bit harsh” as nearly three-quarters of India’s banking is sovereign guaranteed. Also, non-performing assets dependent on government payments could have been treated differently, Kumar, who succeeded Arvind Panagariya, told BloombergQuint’s Contributing Editor Praveen Chakravarty in an interview.
Here are edited excerpts from the interview.
The new Bankruptcy Code will not solve the stock of non-performing assets in the time frame that we want. This was known for three years now. Why were we shying from tackling this?
First, it began to be known for three years. It’s only in the last one year or so that the enormity of the problem has really come up in some cases. That some of our public-sector banks are sitting with more than 20 percent or so NPAs, and their net worth has been wiped out.
That’s because of the asset quality review that the RBI got done.
I think the asset quality review, pardon my saying it, may was a bit too harsh. I say that especially because there were a lot of projects which were dependent on government payments, and receipts from government departments, which were delayed inordinately. That made those projects financially unviable.
Why should the creditor care?
The point is that that if you are a public-sector bank creditor...
So, it’s like government’s left and right hand…
That’s right, so why shouldn’t they have cared. You could have had a different treatment for those NPAs that are dependent on government payments. That’s one part of it. The second part of it is that 70 percent of your banking system is sovereign guaranteed. It’s not going away anywhere. It’s not like you are going to get a bank run tomorrow. So that also meant to me that – this whole 360-degree asset quality review – I am not for a minute supporting the evergreening of loans, those were willful defaulters, they should be given exemplary punishment, as is being done in some cases with the Bankruptcy Code dragging them there – but there are a large number of people, who were probably in a situation, to be able to get back into the black. Those, you have forced banks to push back into the red.
You don’t think that’s a good idea?
Do you? I think it is time now to be a little more nuanced about the situation. It is also time to take the bull by the horns. Accept that there is a problem here and recapitalise the banks, and increase the budgetary allocation of Rs 10,000 crore, by a factor of…
A factor of 10?
Well yes, you said it. Do whatever is needed to get the issue off the problem book.
On interest rates, I don’t subscribe to the call for lower interest rates, maybe we disagree there.
Why don’t you subscribe to it?
The repo rate has gone down by 200 basis points in the last three years, but private investment is still down. Why are interest rates being held up as the villain in this?
On one hand, I think it’s the signaling argument, to answer – ‘what will the government do to revive private investment, how far will it go?’ According to our friend Surjit Bhalla, it is also an argument to say that ‘accept your mistake that you got your inflation expectations all wrong, and therefore don’t punish the innocent because you think there is some hidden guilt.’ That’s one part of it.
On the second part – I agree that maybe the interest rate cut may not be a necessary condition, but it’s also not a sufficient condition. A sufficient condition is for us to create the demand for credit in the economy.
If you talk to bankers, they will say that they are willing to lend; where are the projects and the investment demand?
That is for two reasons. One – for three or four years, we’ve suffered with excess capacity and under-utilisation. If your output gap is positive and large, of course there won’t be any investment demand. The second thing is – I’ve argued for the government coming in with large infrastructure, low gestation projects, on an engineering, procurement, construction (EPC) basis, which will revive the investment climate and get the large companies to begin demanding credit on viable projects.
Just to give you one example, in affordable or low-cost housing, in which the Pradhan Mantri Awas Yojana gives a subsidy, if you de-risk that project by acquiring the land and getting all the approvals, say you want to build 1 lakh houses, and then invite private bidders – the same builders, they come in at that point, and go to the bank to get the working capital. That will get the credit demand going. Once you got that and the multipliers working, you have a pump-priming of the economy by not just pushing up consumption demand, but by actually improving the investment climate.
Watch the full interview here.