India must not neglect bank recap despite Covid pandemic, says former RBI deputy governor

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.

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.

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“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.

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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