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Urjit blames banks for NPA mess

Mumbai: Reserve Bank governor Urjit Patel strongly believes that banks were responsible for creating the massive bad loan crisis by granting big defaulters the benefit of a "soft landing" through a pernicious practice of shovelling more loans to them and refusing to recognise the true quality of the credits.

The banks had a selfish reason for adopting this practice of "zombie" lending: they didn't want to wreck their balancesheets by recognising these assets as non-performing.

The "soft landing" approach had a crippling effect on the system because it perpetuated protracted control of promoters over their failed assets and effectively granted them "the ability to divert cash and assets, often outside of our jurisdictional reach."

Delivering a lecture at the Gujarat National Law University in Gandhinagar on Wednesday, Patel said while non-performing assets in the banking system were over Rs 8.5 trillion, the magnitude of the promoter-bank credit relationship is much more than the bad loans in the system or the alleged fraud at Punjab National Bank (PNB).

Referring to the RBI's Financial Stability Report of June 2017, he pointed out that there was a link between bank frauds and the stressed asset problem in the sector.

The report said in the case of frauds, gaps were seen in various areas that include liberal cash flow projection at the proposal stage, lack of continuous monitoring of cash flows, over valuation, gold plating of projects and diversion of funds.

Further, almost all corporate loan related fraud cases were classified as bad assets for 2-3 years before they were reported as fraud.

"The broad conclusion that has been universally reached is that enterprises in India have over and over again received excessive credit during loan growth cycles, which is followed soon after with repayment problems.

"Rather than resolving credit problems swiftly, banks - either through loan-level fudges or refusal to recognise the true asset quality of the credits - have allowed promoters in charge of enterprises to have a soft landing," he said.

Samudra manthan

Interestingly, Patel turned to Hindu mythology when he referred to the samudra manthan (churning of the ocean of milk where the devas and asuras tried to get amrita or immortality).

According to the RBI governor, while this time the fight was for the nectar of stability, the RBI was willing to don the role of Lord Shiva and consume the poison. Here, he asked the industry to also be on the side of those trying to clean the system.

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