JAITLEY HITS OUT AT RBI FOR LENDINGS
The rift has erupted over multiple issues including PCA
Amid reports of a stand-off between the RBI and the Centre, finance minister Arun Jaitley on Tuesday hit out at the central bank for failing to check indiscriminate lending from 2008 to 2014 which he claimed had led to accumulation of bad loans.
“During 2008-14 to keep the economy artificially going, banks were told to open their doors and lend indiscriminately,” said Mr Jaitley.
Amid reports of stand-off between the RBI and the Central government, finance minister Arun Jaitley, on Tuesday, hit out at the central bank for failing to check indiscriminate lending during 2008 and 2014 that has led to the present bad loan or NPA crisis in the banking industry.
“During 2008-14 after the global economic crisis to keep the economy artificially going, banks were told to open their doors and lend indiscriminately,” said Mr Jaitley at India Leadership Summit organised by US-India Strategic Partnership Forum. “The central bank looked the other way. I am surprised that at that time the government looked the other way, the banks looked the other way, I do not know what the central bank was doing. It was a regulator of these. They kept pushing truth below the carpet,” he said.
The finance ministry is upset with the central bank for publicly talking about a rift with the government, fearing it could tarnish the country’s image among investors.
Last week, RBI deputy governor Viral Acharya had warned that undermining a central bank’s independence could be “potentially catastrophic,” in an indication that it is pushing back hard against government pressure to relax its policies and reduce its powers.
The difference between finance ministry and the Reserve Bank have erupted on number of issues including the finance ministry asking the Reserve Bank to relax its lending restrictions on some banks to boost loan to push growth.
However, the RBI has said that laggards need to improve their performance to come out of the Prompt Corrective Action (PCA) framework. Difference is also emerged on capital norms, independent payments regulator, NBFC liquidity, oversight of PSU banks and NPA recognition rules among others.
During his speech, Mr Acharya had cited the Argentine government’s meddling in its central bank’s affairs in 2010 as an example of what can go wrong. “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” Mr Acharya said.
Mr Jaitley comments on Tuesday comes a day after indication by the finance ministry that it didn’t want to escalate tiff with the RBI.
The government of the day, said Mr Jaitley, was pushing banks to lend which resulted in credit growth in a year shooting up to 31 per cent from the normal average of 14 per cent.
The finance minister said banks went into projects of demerit which did not have the capacity to sustain the capital. “Total bank credit in India from `18 lakh crore in 2008, by 2014 went up to `55 lakh crore. And this is something the banks couldn’t sustain, the borrowers couldn’t sustain and you had the NPA problem,” he said.
The non-performing assets or NPAs were put at `2.5 lakh crore during those times but when an asset quality review was ordered by the new government in 2014, it was discovered that bad loans were of the order of `8.5 lakh crore, said Mr Jaitley.