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Govt must heed Urjit Patel's warning on NPAs, come up with policy response

The former RBI governor has served a warning on the intractable problem of bad loans

Bad loans | Non performing assets | Urjit Patel

Business Standard Editorial Comment 

The Indian economy contracted by about 24 per cent in the first quarter of the current fiscal year and output is likely to shrink even in the second quarter. The overall decline in output and continued weakness in the real sector would increase difficulties for the financial sector. It is possible that non-performing assets (NPAs) in the banking system would be higher than what is being projected. The latest Financial Stability Report of the (RBI) projected an increase in the gross NPA ratio to 12.5 per cent under the baseline scenario, and it can go up to 14.7 per cent in a very severe stress scenario by the end of the fiscal year. While the NPAs are bound to rise, it is worth asking if the system has the capacity to deal with such a situation. The banking system was struggling even before the pandemic. The RBI has now allowed a one-time restructuring of loans. While the details of the programme are awaited, it will be important to ensure that it is not used to hide bad loans, which might suit most stakeholders in the short run. The borrowers would benefit as they can delay the repayment, banks would not have to show bad loans, and the government will have to put less capital in public sector banks. But the problem may persist as it has for many years.



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First Published: Thu, September 03 2020. 00:26 IST