Absence of a deep bond market is major cause for banking crisis: CAG

The major cause for the current crisis in the banking system is the absence of a deep bond market and not “theft and bad lending”, Comptroller and General of India (CAG) Rajiv Mehrishi said on Tuesday.

Lamenting that the narrative in the public domain is unfortunately focused on “theft and bad lending practices”, Mehrishi said these two factors contributed to the banking crisis, but were not the main reasons for the mess.

“My submission is that the current banking crisis is much more complex and that too in a much larger economy. Absence of bond market is the major cause,” Mehrishi said at an event here to mark the launch of Indian School of Public Policy (ISPP).

Mehrishi said in the absence of bond market, banks had to take exposure of ‘long gestation’ infrastructure projects, many of which had implementation issues, leading to huge asset-liability mismatch for the banks.

RBI role

Mehrishi also questioned the role of the RBI as the regulator and wondered how the central bank could have allowed banks to adopt shoddy lending practices running into several years.

Mehrishi called for inter-disciplinary expertise and approach in addressing public policy challenges. He felt that public policy expertise should be built in the country with good foundation of statistics, law, economics and sociology.

Green shoots

The CAG also saw some green shoots in the public policy space, highlighting the FSLRC report and Insolvency and Bankruptcy Code (IBC) implementation.

Mehrishi felt India should fully implement the Financial Sector Legislative Reforms Commission (FSLRC) report recommendations and not in parts as is being done now.

Centre-State relations

In his inaugural address, NK Singh, Chairperson, Fifteenth Finance Commission, said “deep structural reforms” are needed, unlike the current approach of “tinkering” in the name of reforms.

He said the Indian School of Public Policy should focus on ‘Centre-State’ relations, an area that is not adequately addressed by any institution in the country. “You can look at what other mechanisms can be introduced to foster Centre-State coordination. The reason why this is important is that economic reforms cannot be undertaken merely by the Central Government and that States too will have to play a part,” he said.

Singh rued that in all his years of public service he never could get the Rajya Sabha to debate, discuss, engage and analyse on India’s Five-Year Plans.

He said the quality of Parliamentary debate on economic issues remains uninformed.

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