Most bad loans originated between 2006-09: Raghuram Rajan

Raghuram Rajan (File Pic)

The maximum bad loans in the country originated between 2006 and 2009, according to the former governor of the Reserve Bank of India Raghuram Rajan, a time when the UPA government was in power. During the period the economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget, he said.

This revelation was part of the former Reserve Bank of India governor’s 17 page written response to a parliamentary panel on Indian banks’ non-performing assets (NPAs).

His observation was used by the ruling Bharatiya Janata Party to target the opposition Congress in a press conference held by the union minister Smriti Irani on Tuesday. The Narendra Modi-led BJP government has long claimed that its Manmohan Singh-led Congress predecessor was largely to blame for Indian banks’ NPA crisis.

ALSO READ: Smriti Irani blames Congress for mounting NPAs in banking system

Over-optimistic bankers, slowdown in government decision-making process and moderation in economic growth mainly contributed to the mounting bad loans, Rajan said in the note to the Chairman of Estimates Committee Murli Manohar Joshi.

The parliamentary panel had sought Rajan’s advice and “expert view” on the NPA crisis. According to estimates, Indian banks are currently burdened with bad loans that amount to more than Rs 10 lakh crore.

Rajan, who completed his 3-year term as RBI governor in September 2016, laid the blame for this mega NPA crisis on banks, labelling the handing out of loans as a “historic phenomenon of irrational exuberance”.

Indian banks, however, weren’t outliers when it came to this irrational exuberance, Rajan clarified. The phenomenon is “common across countries at such a phase in the cycle,” Rajan said.

“Clearly, bankers were overconfident and probably did too little due diligence for some of these loans. Many did no independent analysis, and placed excessive reliance on SBI Caps and IDBI to do the necessary due diligence. Such outsourcing of analysis is a weakness in the system, and multiplies the possibilities for undue influence,” the note said.

“A variety of governance problems such as the suspect allocation of coal mines coupled with the fear of investigation slowed down government decision making in Delhi, both in the UPA and the subsequent NDA governments.”

Rajan said “…too many loans were made to well-connected promoters who have a history of defaulting on their loans.”

Rajan particularly faulted public sector banks, saying, “Public sector bankers continued financing promoters even while private sector banks were getting out.” “Unscrupulous promoters who inflated the cost of capital equipment through over-invoicing were rarely checked,” Rajan also said.

Another reason behind the Indian banks’ bad loans problem, Rajan said, is that bankers fear they will be ‘subject to harassment by the investigative agencies’ if they label a transaction as fraud.

ON RBI ROLE

In his reply on the NPA crisis, Rajan also spoke about the Reserve Bank of India’s role, admitting that the central bank could have done more and that a “culture of leniency” present at the bank has started changing.

Rajan admitted that the RBI could “probably have raised more flags about the quality of lending in the early days of banking exuberance”.

Rajan said that the RBI could have started the asset quality review (AQR) process earlier than it did and that it could have been “more decisive in enforcing penalties on non-compliant banks”.

This, however, is changing, Rajan said. “This culture of leniency (at the RBI) has been changing in recent years.

On steps required to prevent recurrence rising non-performing assets (NPAs), Rajan suggested that there is need for improving governance of public sector banks and process of project evaluation and monitoring to lower the risk of project NPAs.

Besides, he also made a case for strengthening the recovery process and distance public sector banks from the government.

The Parliament’s Committee on Estimates had invited Rajan to brief it on the matter after former Chief Economic Advisor (CEA) Arvind Subramanian praised him for identifying the NPA crisis and trying to resolve it.

Rajan, who was RBI governor for three years till September 2016, is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth School of Business.

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