Raghuram Rajan Warns Against 'Unprecedented' Rise In Bad Debt Levels In Six Months

Rajan warned that banks are going to witness an unprecedented rise in bad debts and the sooner the problem is recognised, the better it would be.

India   |   15 July 2020 7:34 AM GMT / Updated : 2020-07-15T13:22:52+05:30
Writer : Navya Singh | Editor : Shubhendu Deshmukh | Creatives : Abhishek M
Raghuram Rajan Warns Against Unprecedented Rise In Bad Debt Levels In Six Months

Image Credit: Dainik Bhaskar

Former Reserve Bank of India (RBI) governor Raghuram Rajan on July 14 expressed his discontent over Finance Minister Nirmala Sitharaman's observations about the positive impact of 'Gyan Sangam' (an event where policymakers meet bankers) on bank reforms.

At an event organised by the National Council of Applied Economic Research (NCAER), Rajan warned that banks are going to witness an unprecedented rise in bad debts in six months from now and the sooner the problem is recognised, the better it would be.

"We are in trouble, the sooner we recognise the better it will be," he cautioned. How would the system deal with the mounting bad loans in the financial sector, he asked.

Rajan also suggested that one way to tackle bad loans was the National Company Law Tribunal (NCLT), which had been suspended.

The finance minister in an article in a newspaper wrote that the PM Jan Dhan Yojana launched in 2014 had provided over 390 million poor people access to banks and their services. "Together they have over Rs 1.32 trillion in these accounts," her article read.

"We are still talking about universal (basic income) because we can't target transfers. Jan Dhan does not really work as advertised," he said. Rajan mentioned that not many people recognised that the pandemic was very different from a normal recession.

"It is damaging the players in the economy seriously. Households are going to be deeply starved with very low reserves. It is hard to imagine that many of them will start consuming after the initial bout of pent up consumption," he cautioned.

Rajan also said that one must not consume pent up consumption for normal consumption.

"Our MSMEs are in deep trouble. They started in a bad way with the series of shocks they were subject to before the pandemic. With the pandemic, a significant portion will not survive. That is true of the US with all the support. Think of India, where there is no support. How many will start up after that," he said.

He pointed to one positive aspect in the economy, that was agriculture, which was performing well and the government had also announced reforms for the sector. "These are the reforms which have been talked about for a long time, but will these be implemented?" he asked.

"These can certainly be beneficial for a significant portion of our economy," he said.

Also Read: Sudden Lockdowns In Areas Make Recovery In Employment Difficult: CMIE Data

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