New Delhi: Former RBI governor Raghuram Rajan said, “…a larger number of the bad loans originated in the period of 2006-2008.” That will likely be used as ammunition by the ruling Bharatiya Janata Party to target the opposition Congress.
This revelation was part of the former Reserve Bank of India governor’s written response to a parliamentary panel, one full of stark, biting comments on Indian banks’ non-performing assets (NPAs).The parliamentary panel had sought his advice and “expert view” on the NPA crisis.
Rajan particularly faulted public sector banks, saying, “Public sector bankers continued financing promoters even while private sector banks were getting out of financing the promoters.”
Rajan also blamed public sector banks for inadequate due diligence before and after handing out loans.
Raghuram Rajan says an executive once told him he was ” pursued” by banks, who waved checkbooks and asked him to “name the amount” he wanted in loans.
According to estimates, Indian banks are currently burdened with bad loans that amount to more than Rs 10.4 lakh crore. Rajan, who completed his 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 “historical 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.
Rajan said, “…too many loans were made [given] to well-connected promoters who have a history of defaulting on their loans.”
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.”