Raghuram Rajan's Warning: Will the Central Government Wake Up?

One of the world's foremost economic experts, Raghuram Rajan, who previously served as the Governor of the Reserve Bank of India (RBI), has a wealth of experience guiding Indian banks. Notably, he was among the few who predicted the 2008 global economic crisis and subsequent recession. Now, he continues to criticize the actions of the central government.

Criticism and Caution

Rajan has publicly stated that criticizing the government often leads to threats. Currently, he serves as a professor in the United States, but he continues to caution both the Indian government and Indian banks. This time, his warnings focus on the real estate, construction, infrastructure sectors, and the associated lending practices of Non-Banking Financial Companies (NBFCs).

The Warning

Rajan highlights significant problems in India's real estate, construction, and infrastructure sectors. He advises that NBFCs, which have extended loans to these sectors, should reassess their asset quality.

The Problem

India is currently experiencing what Rajan terms a "growth recession," where economic growth is sluggish, and unemployment is rising. He notes that India's unemployment rate is at a 45-year high. The country's GDP growth rate was only 4.5% in the quarter ending September 2019, the lowest in six years. Concurrently, the issues with shadow banks are worsening, causing an overall economic stagnation.

NBFC Loan Issues

NBFCs in India have been liberal with their lending practices, often extending credit without thorough scrutiny. Now, these institutions are struggling to recover their loans, which hampers their ability to continue lending. This situation leads to a liquidity crunch, where there is not enough credit available in the market.

Public Sector Bank Loan Issues

Similar to NBFCs, public sector banks are also finding it difficult to recover loans. They are burdened with non-performing assets (NPAs) and are unable to extend new credit. This situation exacerbates the overall liquidity crunch in the Indian economy.

Need for Reassessment

Rajan has urged the RBI to reassess the asset quality of NBFCs. He questions whether the government will heed his advice this time.

Response from the RBI Governor

In response to Rajan's advice, RBI Governor Shaktikanta Das addressed the media on December 5, 2019. He assured that the RBI is closely monitoring the top 50 NBFCs, which account for 75% of the total loans disbursed by all NBFCs in India.

Understanding the Issues

Das stated that the RBI has a good understanding of the economic issues and emphasized that no major NBFC will be overlooked. He reassured that the central bank is vigilant and proactive in addressing these challenges.

Positive Indications

It is clear that the RBI is already on the right track, closely monitoring NBFCs. However, it would be prudent for the RBI to follow Rajan's advice and conduct a comprehensive reassessment of NBFC assets. Listening to experienced experts like Rajan and correcting mistakes early on could resolve many issues at their inception.

Conclusion

Raghuram Rajan's insights and warnings come from a place of extensive experience and expertise. It is crucial for those in power to listen and take appropriate actions to mitigate economic risks. Implementing Rajan's recommendations could help stabilize the financial sector and ensure long-term economic growth.