SENSATIONAL statement by former RBI chief: Blames ‘over optimistic bankers’ for bad loans, NPA mess

Most of all, Rajan has taken on the banks, whom he has accused of failing to do due diligence.
Most of all, Rajan has taken on the banks, whom he has accused of failing to do due diligence.

Former Reserve Bank of India (RBI) Governor Raghuram Rajan has written back to the Lok Sabha Committee on Estimates in response to a letter issued to him seeking his input on the Non-performing Assets (NPAs) that have encumbered the balance sheets of Indian banks, and over which there is currently a heated debate in the context of the performance of the Indian economy.

Remarkably, Raghuram Rajan, who exited India’s central bank in September 2016, has, among other things, traced the rise of NPAs in India’s banking system squarely to the time that the UPA government was in power, and has also cited ‘scams and policy paralysis’ as being responsible.


Most of all, Rajan has taken on the banks, whom he has accused of failing to do due diligence. He has recounted that they instead based their lending on good profits of infrastructure firms till 2006, but that two years later, the loans started turning bad.

Rajan, who is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth School of Business, said that the banks were slow to respond to the emerging crisis. On this, he sensationally says that he can’t say whether it was due to incompetence or corruption of bankers.

Consequently to this, Rajan says, banks preferred to evergreen bad loans (essentially meaning restructuring under terms that may allow the debtors to more easily pay them back) rather than declaring them as NPA. As a result, he says that there was a cascading of bad loans over a period of time.


Rajan, who had been appointed India’s Chief Economic Advisor (CEA) and subsequently the RBI governor by the UPA 2 government also cited the massive scams that had been detected to have taken place under Dr Manmohan Singh’s Prime Ministership. He says that once NPAs had begun to cascade, scams such as Coalgate and others slowed down government decision-making, having an adverse impact on ongoing projects, thereby negatively affecting profitability and bad loans.


Rajan also answered in relation to an economic opinion that was expressed recently by the Niti Aayog Vice Chairman Rajiv Kumar, who said mechanisms of identifying and demarcating NPAs implemented during Rajan’s time as RBI governor had resulted in NPAs ballooning from around Rs 4 lakh crore to around Rs 10 lakh crore, thus impacting banks which began to pull back their credit and NPA companies who became starved of working capital, thereby resulting in a slowdown in India’s economy. Rajan, while likely not replying directly, spoke about the scenario but put the blame on the banks. He said that as the RBI introduced measures, banks dithered despite being aware of the crisis. He said that the RBI couldn’t do much as it isn’t a commercial banker, but conceded that RBI representatives on banks’ boards were not effective.

He added that following the asset quality review (AQR) instituted by the RBI, the banks became scared of investigation and this led to more inertia in lending and debt recovery. He said debt recovery tribunals were very slow and took an average of four years.


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