A one sided approach:
The current focus of Indian fiscal restructuring has been explicitly on the borrower side- the moratorium (extended till August), loan restructuring and other indirect measures to raise demand have received a mixed response from the Financial pedigree.
They have been somewhat successful in addressing the demand deficit, one of the major problems faced due to the lockdown. However, a one-sided approach may even lead to extension of the crisis.
Currently, the Indian Banks are swimming in a sea of Bad or potential Bad Debt. The current Bad Debt amounts to about $120 billion and RBI projects the figure to double up by March next year.
Former RBI official speaks out:
The former deputy governor of the Reserve Bank of India (RBI)- Vinod Acharya, made a series of statements addressing this key issue.
He said, “This lack of focus is tantamount to kicking the can down the road and jettisoning financial stability for short-term gains.”
He also pointed out how restoring of Bank’s capital is critical for aiding a meaningful recovery, but the current focus seems to be diverted.
Designing moratoria and forgiveness like farm-loan waivers that favor borrowers excessively in the short term has been detrimental to a sound recovery of credit growth in the medium term, Acharya said.
These comments come as a retrospect to the current government waiving the compound interest of all loans up to 2 crores for the period of moratorium under the lockdown.
Waiver and Restructuring are band aids, should address Bad Debt:
He argued that if the government is not committed to re-vitalize Bank’s resources and tackle the institutional problem of Bad Debt (often arising from political and other problems as well) then it should be so zealous in offering Waivers etc. as that throws the entire system in off the established equilibrium.
“It would be good to learn from the past mistakes and start the work of repairing bank balance sheets at the same time as giving a soft landing to bank borrowers and the real economy.” He concluded.
Mr. Acharya has recently launched a book, “Quest for Restoring Financial Stability in India” that is being hailed by experts and addresses key issue of the Indian fiscal diaspora.