RBI Not Very Vigilant, Banking Sector Staring at a Big Crisis, Warns Nobel Laureate Abhijit Banerjee

Kolkata: Nobel laureate Abhijit Banerjee on Wednesday said the Indian banking sector is facing a huge, deep-rooted crisis that requires immediate attention.

Speaking in context of scam-hit PMC Bank and the emerging problems in the banking sector, Banerjee, who won the Nobel Prize in Economics this year along with two others, said this problem could be used as an opportunity to sell off country’s ailing banks.

“The banking system is facing a huge problem at present. I think it’s been messed up for many, many years and, as a result, it’s a deep problem now...in the sense...it’s a lot of money that needs to be spent and the government doesn’t have that kind of money to fix the banks. I really think this is an opportunity to sell the banks (ailing ones),” said Banerjee, speaking exclusively to News18 over the phone.

The Nobel Prize winner said several banks are staring at a financial crisis and the deeper one goes, the more problems will come out of the closet. “(It happens) every time there is a new bank … it was alright till yesterday and then PMC bank just goes completely belly-up. This is a pattern that has been seen for quite some time now. So my guess is, this is a deep and broad problem. A lot of banks are not in good shape and the total amount needed to bail them out will be huge.”

“I think the right thing to do is to use this opportunity to sell the banks and raise some money and induce that money to bail out the banks,” he said.

“Hopefully, these (ailing) banks still have a branch network and some good people, so they will be saleable. If they are saleable, sell them before you discover more problems. Let somebody else deal with them because the government does not have the bandwidth to do that,” added Banerjee,who won the coveted prize on October 14 along with his wife Esther Duflo and Michael Kremer for their experimental approach to alleviating global poverty.

As per a recent information furnished under the Right to Information (RTI) Act, State Bank of India (SBI), India’s largest bank, wrote off bad loans worth Rs 76,600 crore of 220 defaulters who owed more than Rs 100 crore each.

Calling the development a mere “tip of the iceberg”, Banerjee said such incidents are bound to lead to mistrust among the people.

“Yes, it will create a mistrust. I don’t blame them (account holders). This is alarming. I think it’s just the tip of the iceberg. There is more. I mean just the pattern seems to be very revealing. No one is saying anything. The RBI is not very vigilant in giving warning to these banks and suddenly we find this crisis,” he said.

Reiterating that the government should use the opportunity to privatise the ailing banks, he said, “These banks (ailing one) are overstaffed, have bad returns, made a lot of bad judgments and the business sector took them for a ride for years. The government should use the opportunity to

News 18 had earlier reported that in the last three years, the Indian banking system has lost Rs 1.76 lakh crore on account of non-performing loans of 416 defaulters — each owing Rs 100 crore or more — being written off. On an average, the amount declared as bad loans turns out to be around Rs 424 crore per borrower.

A total of Rs 2.75 lakh crore has been written off for entities that borrowed Rs 100 crore or more from scheduled commercial banks. The latest statistics divulge that Rs 67,600 crore was declared as bad debts for loans of Rs 500 crore and more.

As many as 980 borrowers have been enlisted by the RBI whose debts of more than Rs 100 crore each had to be written off by banks. Of these, 220 accounts – more than one-fifth of the total number – belonged to the SBI. An average of Rs 348 crore was waived off in respect of each such account.

In the last one week, three account holders with the PMC Bank have died after the bank was put under restrictions by the RBI following the discovery of a Rs 4,355 crore scam. Deposit withdrawals have been capped at Rs 40,000 over a six-month period, causing panic and distress among depositors.

Real estate firm HDIL allegedly accounted for 70 per cent of the bank's Rs 9,000 crore advances. According to the Mumbai Police's Economic Offences Wing, HDIL's loans turned Non-Performing Assets, but the bank management hid this from the RBI's scrutiny.