Don’t overstate bad loans crisis, says Fin Min Jaitley

“It’s that limited category where there is some kind of a prima facie misconduct or misdemeanour which has taken place by the individual... those areas which will be looked into differently,” the finance minister said.

Finance minister Arun Jaitley asked banks on Saturday not to “overstate” the crisis of bad loans as that could derail lending and hurt the economy, though he promised to look into individual misdemeanour amid outrage over the Rs 7,000 crore default by liquor baron Vijay Mallya.

“We don’t want to create a situation where we overstate the crisis and in the process, the whole activity of lending for growth itself starts suffering because people become extraordinarily defensive,” Jaitley said at a press conference after a post-budget meeting with the central board of the Reserve Bank of India (RBI).

“It’s that limited category where there is some kind of a prima facie misconduct or misdemeanour which has taken place by the individual... those areas which will be looked into differently,” the finance minister said.

Gross non-performing assets (NPAs) – loans that have turned unproductive – increased from 5.43% as of March 2015 to 7.30% as of December 2015. RBI governor Raghuram Rajan said banks must be careful and a balance needed to be maintained.

Rajan said at a conference organised by the finance ministry and the International Monetary Fund that while the remedy might be to write off debt to revive demand from the indebted, it was debatable whether additional debt-fuelled demand was sustainable.

“At any rate, large-scale debt write-offs seem politically difficult even if they are economically warranted,” he said, adding that structural reforms that increased competition and fostered innovation would “raise potential growth”.

Rajan said the government’s commitment to stick to the fiscal deficit target of 3.5% of GDP for the next financial year was a matter of comfort. He said while the country was moving in the right direction, economic growth remained weak.

“Both the markets and the RBI have been comforted by that (the government’s commitment to adhere to the fiscal deficit target of 3.5%)… how it will reflect on the monetary policy, you will have to wait and see,” Rajan said.