Home / Industry / Banking /  India’s financial sector to see record levels of bad loans in six months: Rajan

Former Reserve Bank of India governor Raghuram Rajan on Tuesday said India’s financial sector is in deep trouble as the pandemic-induced recession will lead to unprecedented level of bad loans in six months’ time.

Intervening at a webinar organized by Delhi-based economic think tank NCAER, Rajan said the pandemic-induced recession is different from normal recession. “Initial bout of pent up consumption can’t be taken as normal consumption. This pandemic will adversely affect all the players in the economy. Financial sector will see a huge increase in bad loans after the pandemic. In such a scenario, focussing on credit rating is nuts. Focus should be on expenditure and how to come out of the recession," he added.

Commenting on finance minister Nirmala Sitharaman’s opinion piece published in The Times of India on Tuesday titled “bold decisions, strong political will", Rajan said the finance minister’s piece is “thoroughly disappointing" as it didn’t address the present challenges.

“I don’t know when the piece was written but it was thoroughly disappointing. The levels of NPA will be unprecedented six months from now. We are in trouble. Sooner we recognize it, the better for us," he added.

In her presentation at the webinar, Prachi Mishra, chief India economist at Goldman Sachs said she expects GDP to contract 4.4% in FY21 and that the uncertainty around the country’s medium term growth outlook continues to be very high. “There are several unknowns—how the virus will evolve globally and domestically, how successful government actions will be in limiting the spread of the virus, how quickly potential vaccines globally will develop, how strongly and for how long people will choose to cautiously avoid normal activities, and how effective macroeconomic policies will be in supporting the economy," she added.

On the risks to the country’s financial system, Mishra pointed out lack of a significant credit offtake from programmes announced by the government, higher non-performing loans and risks related to fraudulent practices.

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