Larger number of bad loans originated during 2006-2008, fraud not discouraged: Ex-RBI Governor Raghuram Rajan flays UPA Govt for NPA mess
In his reply to the Estimates Committee, Rajan said that in such an environment bankers' became over confident started lending large loans 'based on project reports by the promoter’s investment bank, without doing their own due diligence'.
Former RBI Governor Raghuram Rajan has blamed bankers' over optimism, growth slowdown and policy paralyses for the rising NPAs in a note to 30-member Lok Sabha Committee on Estimates. The panel, headed by BJP veteran Murli Manohar Joshi, had asked Rajan for a briefing on the banking sector's mounting bad loans.
In the 17-page note in possession of India TV, Raghuram Rajan told the Estimates Committee that banks made mistakes because of strong economic growth projections based on past performances.
"A larger number of bad loans were originated in the period 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget. It is at such times that banks make mistakes," the note said.
In his reply to the Estimates Committee, Rajan said that in such an environment bankers' became over confident started lending large loans 'based on project reports by the promoter’s investment bank, without doing their own due diligence'.
"It is hard to tell banker exuberance, incompetence, and corruption apart. 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," he said in the note.
The former RBI governor said that global economic slowdown made growth projections unrealistic.
Raghuram Rajan also blamed delays and foot-dragging at the governments' end for the rising NPAs. 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, he alleged in the note to the committee.
The note, which was prepared by Rajan on September 6 in response to Estimates Committee head Joshi's request, further says that a lits of high profile fraud cases was sent to PMO, but not action was taken to book or deter the culprits.
He said: "The RBI set up a fraud monitoring cell when I was Governor to coordinate the early reporting of fraud cases to the investigative agencies. I also sent a list of high profile cases to the PMO urging that we coordinate action to bring at least one or two to book. I am not aware of progress on this front. This is a matter that should be addressed with urgency."
'RBI did not create NPAs'
The former governor clarified that the central bank cannot be blamed for non-performing assets or their rise, as it 'is primarily a referee, not a player in the process of commercial lending'.
"Bankers, promoters, or their backers in government sometimes turn around and accuse regulators of creating the bad loan problem. The truth is bankers, promoters, and circumstances create the bad loan problem," Rajan said.
He explained that the regulator (RBI) cannot substitute for the banker’s commercial decisions or micromanage them or even investigate them when they are being made. Instead, in most situations, the regulator can at best warn about poor lending practices when they are being undertaken, and demand banks hold adequate risk buffers, he added.
However, the economist did not attempt to absolve the central bank of all the guilt in the matter. He admitted that the RBI should probably have raised more flags about the quality of lending in the early days of banking exuberance.
In the hindsight, he said, we should probably not have agreed to forbearance, though without the tools to clean up, it is not clear what the banks would have done. Forbearance was a bet that growth would revive, and projects would come back on track.
Also, we should have initiated the new tools earlier, and pushed for a more rapid enactment of the Bankruptcy Code. If so, we could have started the AQR process earlier. Finally, the RBI could have been more decisive in enforcing penalties on non-compliant banks. Fortunately, this culture of leniency has been changing in recent years, Rajan claimed.
Road ahead to curb future NPAs
Rajan, who is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth School of Business, suggested that going forward it was essential to improve governance of public sector banks and distance them from the government.
He said that banks will have to significantly improve in-house expertise to improve the process of project evaluation and monitoring to lower the risk of project NPAs.
Apart from stregthening the recovery process further, he also suggested that the government should refrain from setting ambitious credit targets or waiving loans and instead focus on sources of the next crisis, not just the last one.
Niti Aayog VC blames Rajan
Niti Aayog Vice Chairman Rajiv Kumar had recently said that it wasn't demonetisation but deleveraging of credit under Rajan's tenure that led to economic slowdown.
Pinning the blame squarely on Rajan's policies as governor of central bank, Kumar had said the economic growth was declining due to rising NPAs in the banking sector. "When this government came into office, this figure was about 4 lakh crore. It rose to 10.5 lakh crore by the middle of 2017," he added.
"Under the former RBI Governor Raghuram Rajan, they had instituted new mechanisms to identify stressed and non performing assets. This is why the banking sector stopped giving credit to the industry. In fact, in some cases like MSMEs, credit growth shrank. Even in the large industries, the growth of credit came down to measly 1 per cent in some quarters," Niti Aayog vice chairman had claimed.
"This has been the highest deleveraging of commercial credit to the industry in India's economic history," Kumar had said.