What is the issue?
RBI has failed in effectively regulating the banking system.
What are the burdens of Indian banking?
- Sub-Prime Infrastructure that led to potential loss of Rs 6 lakh crore for the banks.
- Limited recourse lending - These are the loans of several lakh crores of rupees that were given for power and highway projects.
- Banks do not have recourse to any collateral security and rely primarily on anticipated project revenues.
- Discom issues - PSBs have been continuously lending to near-bankrupt Discoms in order to fund their ballooning losses
- UDAY scheme transferred the unrecoverable loans of discoms to the respective state governments who will use taxpayers’ money for repayment over the next decade.
What are problems with RBI?
- RBI failed to detect the financial backlogs in time, and failed to contain the internal crisis of gigantic proportions.
- It is one single institution, which is held responsible for the despicable state of India’s banking sector, its statutory capabilities are failed in dealing the large sector.
- RBI failed to adopt the prudent practices associated with limited recourse lending.
- The regulatory inspections of RBI failed to flag large-scale malfeasance that was certain to result in bad debts.
What are the outcomes the failures?
- The taxpayer will pay over Rs 3 lakh crore in the form of government bailouts or other indirect support to meet the losses of banks on account of such irresponsible lending to projects.
- An equal amount would also be borne by taxpayers to cover the bank loans to Discoms across the country.
- The resultant losses cannot be recovered from consumers for political and economic reasons.
- In the absence of a vigilant regulator, banks went wayward and lost heavily.
- Banks have moved away from investment lending, which in turn has stunted the growth of incomes and employment.
Source: Business Standard
