Urjit Patel touched upon several issues including bad loans, bank regulation and bankruptcy resolution

India's bad loan problem slowly morphed into a full-blown crisis due to a lack of timely action by regulators and the government for several years until 2014, and it was largely driven by state-owned banks, former central bank governor Urjit Patel said.

Dr Patel in his first public appearance since his abrupt exit from the central bank as its governor in December gave a presentation at Stanford University's annual conference on Indian economic policy on June 3-4.

His presentation, which touched upon several issues including bad loans, bank regulation and bankruptcy resolution, was released by the university late Thursday.

State-owned banks have also been marred by higher incidence of frauds due to their poor operational risk management and internal audits, Dr Patel said.

"The high level of net non-performing assets compared with other countries implies that current headline capital adequacy is, in effect, overstated," he added.

The country's banks and financial institutions hold a bad debt of over Rs 10 trillion ($150 billion) and this has affected their ability to lend and also spur economic growth.

About 90% of fraud cases have occurred in government banks, Dr Patel said in his presentation.

"The government banks are nudged to (over-)lend to pump prime the economy/boost preferred sectors. But this leads to higher NPAs over time, which requires equity infusion from the government, and this eventually adds to the fiscal deficit and sovereign liabilities (e.g., on account of recap bonds) in due course, anyway," Dr Patel said.

"Culmination is a vicious cycle: as the government's headroom for running (even) higher fiscal deficits is (virtually) exhausted," the 24th governor of the Reserve Bank of India (RBI) said.

At the 2019/20 union budget presentation on Friday, Finance Minister Nirmala Sitharaman said the government would bring down the country's fiscal deficit to 3.3% from the interim budget target of 3.4%.

"How did we get here? Plenty of blame to go around. Prior to 2014, all stakeholders failed to play their role adequately," Dr Patel said.

Regulators should have acted earlier, and had failed in gauging when extant assumptions were getting stretched and needed revision. He also blamed the government for not playing its role completely as the principal shareholder and manager of the economy's health.

Dr Patel, however, defended the RBI's actions with him at the helm including the large fines and strictures on bank management, which were imposed for under-reporting NPAs and regulatory violations.

"The government and regulator face a trilemma: Not possible to (i) have dominance of government banks in the banking sector (ii) retain independent regulation; and (iii) adhere to public debt-GDP targets," Dr Patel said.

"All three are not feasible on a durable basis. After fiscal dominance over monetary policy, are we looking at fiscal dominance over banking regulation?"