India’s financial sector to experience record levels of bad loans in six months, Rajan says

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Former Reserve Bank of India Governor Raghuram Rajan said on Tuesday India’s financial sector was in dire straits as the pandemic-induced recession would result in an unprecedented level of bad debts six months from now.

Speaking at a webinar hosted by Delhi-based economic think tank NCAER, Rajan said the pandemic-induced recession is different from the normal recession. “The repressed initial consumption cannot be considered as normal consumption. This pandemic will negatively affect all players in the economy. The financial sector will see a huge increase in bad loans after the pandemic. In such a scenario, focusing on credit scoring is crazy. The focus should be on spending and how to get out of the recession, ”he added.

Commenting on the opinion piece by Finance Minister Nirmala Sitharaman published Tuesday in The Times of India titled “Bold decisions, strong political will”, Rajan said the article by Finance Minister was “completely disappointing” because it did not respond to current challenges.

“I don’t know when the play was written, but it was really disappointing. NPA levels will be unprecedented six months from now. We are in trouble. The sooner we recognize it, the better it will be for us, “he added.

In her presentation to the webinar, Prachi Mishra, chief economist for India at Goldman Sachs, said she expects GDP to contract 4.4% in FY21 and that the he uncertainty surrounding the country’s medium-term growth prospects continues to be very high. “There are several unknowns – how the virus will evolve globally and nationally, to what extent will government actions limit the spread of the virus, how quickly will potential vaccines grow around the world, with what strength and for how long will people choose to cautiously avoid the normal. activities and to what extent macroeconomic policies will be effective in supporting the economy, ”she added.

Regarding the risks to the country’s financial system, Mishra highlighted the absence of a significant drawdown of credit in the programs announced by the government, the increase in non-performing loans and the risks associated with fraudulent practices.

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