The Reserve Bank of India, which has set historically low policy rates to facilitate an expansionary monetary policy, suffers from structural and operational challenges, the award-winning author and columnist said.

One of the key hurdles is the differences in vision of the central bank and the government. While the central bank operates with long-term prospects in mind, the government mostly spends its resources on short-term needs. 

The RBI is the “government’s merchant bank” and also “answerable to Parliament,” which makes the central bank’s position tricky, he pointed out.

Bandhopadhyay, who has worked with Business Standard, The Economic Times, Mint and Financial Express, also detailed the issues with banks deviating from their core business of lending to opt for the regulator’s safety cushion. 

As banks’ assets–loans and investments–have deteriorated, they are increasingly seeking refuge in safer government securities, which deals a blow to credit growth and also puts pressure on liquidity in the financial system. 

He also talked about Indian banks’ bad loan problem.

The banks’ hesitation to come clean about non-performing assets impairs the regulator’s attempt at cleaning up their books, said Bandhopadhyay, the writer of six books including “Pandemonium: The Great Indian Banking Tragedy”.

That said, he expects the RBI’s resolution to take up bad debt coupled with the Insolvency & Bankruptcy Code (IBC) to root out bad loans over time.