India risks 'Japanification' amid rising bad loans, COVID-19, warns Viral Acharya

Former Reserve Bank of India (RBI) deputy governor Viral Acharya has warned that India risks entering into the same path that took Japan to the "lost decade" in the 1990s amid rising bad loans and the coronavirus crisis. With increasing tolerance towards loose lending and provisioning practices, India risks seeing a very weak economic growth or 'Japanification' - referring to Japan's experience in the 1990s when a muted banking and financial sector negatively impacted the country's economic activity and contributed to a lost decade.

"Certainty with the Covid shock, and as highlighted in the RBI's financial stability report, the bad loans are likely to mount to 12-15 per cent region," Acharya told Bloomberg. "Given all that, Japanification is a serious concern and the way out of it is to raise capital in the financial intermediation sector. The time is now," he added.

According to the RBI's latest semi-annual financial stability report, non-performing assets (NPAs) may rise 4 percentage points to 12.5 per cent of total advances by March 2021, the highest since the year ended March 31, 2000, under the baseline stress scenario. The ratio may rise to 14.7 per cent under severely stressed scenario, it added.

In an interview to India Today TV, Acharya had raised the issue of rising NPAs, citing RBI's recent report. "RBI's recent financial stability report seems to suggest that in a stress scenario, which now a lot of economic analysts are attaching a high probability on GDP contraction, the bank NPAs could become very large," he had said.

He had also said that there is still time for structural reforms to improve financial and fiscal stability in India. Acharya's comments come at a time when India is witnessing one of the worst economic slowdowns ever due to the coronavirus crisis.