New Delhi: Reserve Bank of India (RBI) Governor Shaktikanta Das' call to permit a few weak public sector banks to start lending again is "short-sighted" as it risks accumulating bad debts with renewed vigour, Priyanka Kishore, head of India and Southeast Asia economics at Oxford, wrote in a note. To support credit and economic growth ahead of this year's General Elections, the Central bank, after Das took over as Governor, eased lending curbs on weak state-run banks.
Of the 11 banks on whom tough restrictions were placed since 2014, five have recently been allowed to exit the regulator's so-called Prompt Corrective Action framework.
To support credit and economic growth ahead of this year's General Elections, the Central bank, after Das took over as Governor, eased lending curbs on weak state-run banks
"The short-term palliative comes at a long-term cost," she wrote. "Pushing back full resolution of stressed bank balance sheets is only likely to prolong India's investment malaise."
The country is already dealing with the worst bad-loan ratio in the world. Even as Prime Minister Narendra Modi's government infused record amounts into public sector lenders, soured loans have contributed to around US$ 200 billion of zombie debt.
"With bad debts concentrated in the industrial sector, weak public sector banks are likely to continue to limit their exposure to these entities, which, in turn, should keep investment growth trapped in the low double digits and cap India's growth well below the desired 8 to 9 percent," Kishore said.