A mess: Patel admits RBI was slow to take timely measures

A failure on the part of banks, the government and the regulator till 2014 has got us into the current bad loan mess and the resultant low capital buffers, Urjit Patel, the past Reserve Bank Governor, has said, asking all to resist the temptation of going back to the status quo.

In his first comments after resigning as RBI governor on December 10 last year amid sharp differences with the government, Patel said banks indulged in over-lending, while the government did not "fully play" its role, and also conceded that the regulator should have acted earlier.

Speaking at an event in Stanford University on June 3, Patel listed out areas of concern for the country's banking sector, including high non-performing assets (NPAs) especially at state-run lenders, and current capital buffers being "overstated" and being insufficient to tackle the huge stress.

"How did we get here? Plenty of blame to go around! Prior to 2014, all stakeholders failed to play their role adequately. Banks, the regulator and government," he said in the presentation.

It can be noted that after 2014, which saw a change of guard in government and also Patel's predecessor Raghuram Rajan assuming charge, the RBI started an asset quality review, which led to the recognition of the huge pile of hidden stress in the system and resolution through the introduction of bankruptcy laws.

These actions led to a sharp decline in banks' ability to fund the needs of the economy, where growth has been sagging.

Patel, who spent over five years at the RBI, including his role as the deputy governor, advised to stay on the course even in the face of difficulties.

"Temptation to reset 'back to the past' should be eschewed," Patel said, adding that "episodic concerns" on stability are possible if there is "foot dragging, or, worse, back-pedalling".

"Short-cuts/sweeping the problem under the carpet is unlikely to work; but will only delay unlocking of capital, and come in the way of financing future investment efficiently," he warned.

In the presentation a copy of speech was not available Patel also said, "After fiscal dominance over monetary policy, are we looking at fiscal dominance over banking regulation now."