Former Reserve Bank of India (RBI) governor Raghuram Rajan has lashed out at the UPA government for being responsible for the pile of NPA (non-performing assets) in the banking system. He also had a word of praise for the Narendra Modi administration to manage the NPA problem successfully.
“I went to the late Arun Jaitley (the then Minister of Finance) and said, ‘Look, we are going to have these bad loans, and they need to come out. Otherwise, they will keep the system from cleaning up and lending. You want the system to push ahead,” was what Rajan, now the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago’s Booth School mentioned in an interview with The Print.
“Projects weren’t getting land, environmental permissions etc. So, they were building NPAs in the financial system, which is typical after a period of exuberance, euphoria,” the former RBI governor remarked. His remarked indicated that after the financial crisis of 2008, many projects were in deep trouble. These were kicked off earlier. Besides, India was tormented by allegations of corruption which resulted in a lot of delays in obtaining necessary permissions for projects. Rajan also mentioned that Arun Jaitley told him to go ahead and the process began to roll.
Rajan also spoke on how the process of Asset Quality Review was introduced. It consisted in scrutinising the accounts of banks to arrive at a consistent mode of treating borrowers across the board. Rajan said that during his predecessor’s (Duvvuri Subbarao) time, RBI had a moratorium on declaring loans as NPA. “However, this resulted in banks holding onto large chunks of bad loans without recognising them… The moratorium ended during my first year in 2014, and we realised that extending and pretending would create bigger problems down the line. Historically, this approach has always led to issues, so we needed to clean up,” Rajan observed.
The former RBI governor said as a result public sector credit to the economy was going down and the books of banks were getting choked with bad loans. As a result, the managements became cagey to sanction even good loans, Rajan mentioned.
