Despite the Reserve Bank's liberal policy, lending to the economy has been sluggish

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- Former governor's opinion on the risk of instability

MUMBAI: Former Reserve Bank Deputy Governor Rakesh Mohan has written in a research paper that there is a risk of financial instability in the tense banking sector in view of the growing contradiction between overflowing capital markets and mounting pressure on the economy.

Despite a liberal policy by the Reserve Bank, lending to the economy has been sluggish while capital markets have been rising. Thus the picture of credit withdrawals and capital market movements is quite the opposite. This can lead to an increase in both lenders and borrowers who are currently experiencing stress, which can lead to financial instability.

Rakesh Mohan has twice been the Deputy Governor of the Reserve Bank from 2007 to 2008.

The vote comes ahead of the Reserve Bank's biennial financial report. Investors expect the financial report to shed light on the role of the banking sector in tackling the country's economic downturn.

India is facing the problem of massive bad loans in large economies. The recession during the Corona era slowed down the ability of industries to repay loans, forcing the government to take action, including a moratorium.

The second wave of Corona, which has hit the country's economy to the tune of Rs 2 lakh crore, will not go unnoticed by the banking sector, said another analyst.

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