Larger Chunk of NPAs Originated in 2006-08: Raghuram Rajan

Former RBI Governor Raghuram Rajan has told a Parliamentary panel that a larger number of bad loans or NPAs (non-performing assets) originated in 2006-2008 (during Congress-led UPA’s rule), when Indian economic growth was strong as the banks made mistakes. He lamented that till date not a “single high-profile fraudster” had been brought to book despite his forwarding a list to the Prime Minister’s Office.

"I sent a list of four high-profile cases to the PMO for coordinated action to bring at least one or two offenders to book. I am not aware of the progress. This is a matter that should be addressed with urgency," Rajan said in a note prepared on request of Parliament’s Estimates Committee Chairman and BJP leader Murli Manohar Joshi.

The former Reserve Bank of India chief said that the bank recovery rate on defaulted loans was only 13% of the amount at stake… “the inefficient loan recovery system gave promoters tremendous powers over lenders".

Referring to malfeasance and corruption as a factor in the NPA problem, he said: "Undoubtedly, there was some... clearly, bankers were overconfident and probably did too little due diligence for some of these loans."

Rajan said the RBI set up the fraud monitoring cell during his Governorship to coordinate early reporting of such cases to the investigative agencies.

"Unfortunately, the system has been singularly ineffective in bringing even a single high-profile fraudster to book. As a result, fraud is not discouraged,” he said.

Rajan also called for examining MUDRA loans and Kisan Credit Cards more closely for potential credit risk, adding that the Credit Guarantee Scheme for MSMEs (medium, small and micro enterprises) run by SIDBI was a growing contingent liability and needed to be examined with urgency.

Loan Waivers & Polls

The former RBI governor said loan waivers vitiate the credit culture and an all-party agreement to this effect would be in the country's interest in view of impending elections.

The Congress and Bharatiya Janata Party have traded charges over mounting NPAs and the Congress has been pressing the Modi government to announce loan waiver to farmers.

The former RBI Governor said that sometimes banks signed up to lend money based on project reports by the promoter's investment bank without doing their own due diligence.

 Rajan said that a variety of governance problems, such as suspect allocation of coal mines coupled with fear of investigation slowed down government decision-making in Delhi, both in the United Progressive Alliance and its successor NDA governments.

 "Project cost overruns escalated for stalled projects and they became increasingly unable to service debt. The continuing travails of the stranded power plants, even though India is short of power, suggests government decision-making has not picked up sufficient pace till date," he added.

 Referring to malfeasance and corruption as a factor in the NPA problem, Rajan said: "Undoubtedly, there was some... clearly, bankers were overconfident and probably did too little due diligence for some of these loans."

 However, he said, the size of fraud in public sector banking has been increasing though it still is small relative to overall volume of NPAs.