The reckless lending by PSU banks is seen as an outcome of pressure by UPA government to step up credit.
New Delhi: The irony is hard to miss.
A comprehensive note on India’s bad loans crisis by previous RBI governor Raghuram Rajan has placed much of the blame at the door of the Congress-led UPA government, giving some much-needed ammunition to the Modi government which is struggling to counter the opposition onslaught on rising fuel prices and a falling rupee.
For those with short memories, Rajan and the Modi government did not exactly part on pleasant terms after Rajan’s three-year term on Mint Street ended in September 2016 and New Delhi did not give him a second term.
But that does not seem to have stopped Rajan from calling a spade a spade.
The note in question was written by Rajan on 6 September at the request of veteran BJP MP Dr Murli Manohar Joshi in his capacity as chairman of Parliament’s Estimates Committee. The committee wanted Rajan to brief it on bank NPAs or non-performing assets after outgoing chief economic advisor Arvind Subramanian praised him for identifying the NPA crisis and trying to resolve it.
Living up to his reputation of a straight-talking, no-nonsense economist, Rajan cuts to the chase with the first question posed to him: Why did the NPAs occur?
“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,” Rajan has said, referring to the middle years of UPA-1 whose good growth has been attributed by economists to the seeds sown by Vajpayee’s NDA government.
“It is at such times that banks make mistakes,” Rajan adds.
It is no secret that corporate lenders in the public sector were under immense pressure to step up lending during the period Rajan refers to and the following years under UPA-1 and -2. It is also no secret that the UPA government wanted banks to continue providing a stimulus to infrastructure projects, including those in the private sector, leading to the reckless lending Rajan refers to.
The former central bank governor then goes on to talk about what he calls “government permissions and foot-dragging”.
He says “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”. But he also adds that this happened under the UPA as well as its successor NDA, not letting the Modi government off the hook for its initial hesitations to tackle the mess it inherited.
“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 to date.”
There are more hints of the influence of the government of the day on bankers to lend when Rajan talks about malfeasance and corruption in the NPA problem.
“Public sector bankers continued financing promoters even while private sector banks were getting out, suggesting their monitoring of promoter and project health was inadequate. Too many bankers put yet more money for additional ‘balancing’ equipment, even though the initial project was heavily underwater, and the promoter’s intent suspect,” Rajan says.
“Finally, too many loans were made to well-connected promoters who have a history of defaulting on their loans.”
Rajan also blames banks for poor recovery of loans under UPA-2, attributing it to a mix of policy and legal inadequacies.
“When I took office it was clear that bankers had very little power to recover from large promoters. The Debts Recovery Tribunals (DRTs) were set up under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 to help banks and financial institutions recover their dues speedily without being subject to the lengthy procedures of usual civil courts,” he says.
“The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 went a step further by enabling banks and some financial institutions to enforce their security interest and recover dues even without approaching the DRTs.
“Yet the amount banks recover from defaulted debt was both meagre and long delayed. The amount recovered from cases decided in 2013-14 under DRTs was Rs 30,590 crores while the outstanding value of debt sought to be recovered was a huge Rs 2,36,600 crores. Thus recovery was only 13% of the amount at stake.
“Worse, even though the law indicated that cases before the DRT should be disposed of in 6 months, only about a fourth of the cases pending at the beginning of the year were disposed of during the year — suggesting a four year wait even if the tribunals focused only on old cases.
“However, in 2013-14, the number of new cases filed during the year were about one and a half times the cases disposed of during the year. Thus backlogs and delays were growing, not coming down.”
While Rajan is unsparing of the events under UPA, he gives some credit to the Modi government for starting the bank clean-up process “in earnest” in the second half of fiscal 2015, while faulting it on other grounds.
“The government has dragged its feet on project revival – the continuing problems in the power sector are just one example,” he says, referring to the NDA.
“The steps on reforming governance of public sector banks, or on protecting bank commercial decisions from second guessing by the investigative agencies, have been limited and ineffective. Sometimes even basic steps such as appointing CEOs on time have been found wanting. Finally, the government has not recapitalized banks with the urgency that the matter needed (though without governance reform, recapitalization is also not like to be as useful).”
“Government should focus on sources of the next crisis, not just the last one,” Rajan, who is now the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth School of Business, says before signing off. “In particular, government should refrain from setting ambitious credit targets or waiving loans.”
Now, those are economic misdemeanours both the UPA and the NDA have shown they are equally capable of for short-term political benefit.
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