New Delhi: Former chief economic adviser Arvind Subramanian believes that India’s financial system needs another asset quality review (AQR), one that is similar to the clean-up exercise that was first initiated by former Reserve Bank of India (RBI) governor Raghuram Rajan in 2015.
Subramanian, who was participating in a OP Jindal lecture discussion with Rajan at Brown University on Wednesday, pointed out that there now existed some uncertainty after the recent NBFC (non-banking financial company) crunch and that it ideally should be cleared.
After the collapse of IL&FS in September 2018, the Narendra Modi government has had to grapple with fears that the development would result in a cascading effect across the NBFC space. These worries have intensified with the recent crises in the Reliance ADAG and DHFL groups.
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In his remarks, the former chief economic adviser noted that while Rajan was able to effectively activate the bad loan recognition process in 2015-16, India is perhaps now back to a period of uncertainty in this regard.
“And now this is the problem. We are back to uncertainty… We don’t know now how much is the problem with the non-banking financial companies and the consequence of those back to the public sector banks. So, I would argue that the asset quality review that Raghu initiated, I think we’re sorely overdue for another one, both for the NBFCs and the banks because once again there is too much uncertainty,” he said.
A slide from Arvind Subramanian’s presentation at Brown University. Credit: The Wire.
Subramanian’s comments add to a growing debate in India. For instance, in August 2019, RBI governor Shaktikanta Das effectively ruled out the possibility of an AQR for NBFCs, but noted that they were being closely monitored.
At the same time, rumours have been growing that such a review cannot be put off for long and that the central bank may have started doing one under the guise of sharper scrutiny.
In his short speech at Brown University, Subramanian added that the current problems facing the NBFC and real estate sector were perhaps so systemic that it would be apt to say India has a ‘Twin Plus Twin Balance Sheet’ challenge.
This is a play on the ‘Twin Balance Sheet’ problem that the former chief economic adviser popularised in his Economic Surveys.
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“We have really gone from ‘Twin Balance Sheet’ challenge which is about banks and the infrastructure companies to what I would call a ‘Twin Plus Twin Balance Sheet’ challenge, where on the financial side, the NBFCs have been adding to the stress and on the borrowing side it’s not just big infrastructure companies, but certainly real estate companies have also come into the problematic category,” he said.
“We have rising NPAs once again and intensification of corporate stress.”