Former RBI deputy chief warns of rise in bad loans due to covid

Former Reserve Bank deputy governor Rakesh Mohan (Photo: Mint)
Former Reserve Bank deputy governor Rakesh Mohan (Photo: Mint)

Summary

India’s expanded credit push to help small borrowers weather Covid-19’s impact risks fueling sour debt, a former central banker warned

India’s expanded credit push to help small borrowers weather Covid-19’s impact risks fueling sour debt, a former central banker warned.

Prime Minister Narendra Modi’s government provided a 4.5 trillion-rupee ($62 billion) emergency credit program, as well as loan guarantees, as the first line of defense to help sectors hit by the pandemic. The measures have stoked further concerns about asset quality in a country with the worst bad loan ratio among major economies.

“This is certainly an area of concern which the regulator will have to watch very carefully," Rakesh Mohan, an ex-deputy governor at the Reserve Bank of India, said in an interview with Bloomberg Television’s Haslinda Amin and Yvonne Man on Wednesday. “We don’t know the actual impaired assets in the banking system, which are bound to be significant."

The state of those impaired assets with banks would become clear only when the Covid situation ebbs, said Mohan, who served at the RBI twice between 2002 and 2009. Lenders are already facing some difficulty in collecting dues from small borrowers, he said.

Other points from the interview:

Although the economic recovery in April-June period is “encouraging", it is still lower than what it was few years ago. “We have to be somewhat cautious on interpretation of what’s going on. Bright spot is the recovery of manufacturing and construction"

India’s central bank “will have to be somewhat nimble in response to what happens in the rest of the world" with regard to policy normalization

It “would not be wise for the government to bring down taxes on fuel" as the nation has a “long-term fiscal problem" and needs revenue

There seems to be a disconnect between economic growth and stock markets, and “would expect a significant correction at some time"

 

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