Raghuram Rajan Blames UPA Corruption For Bank NPAs, Lauds Modi Government’s Write-Offs
Raghuram Rajan elaborated on initiating the Asset Quality Review, which involved examining the books of every bank to ensure consistency across the banking system.
Corruption under the UPA government was the main reason for bank non-performing assets, according to former Reserve Bank of India Governor Raghuram Rajan. He praised the Modi government for addressing the issue from the UPA era to help banks recover through write-offs.
"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,'" Rajan said in a recent interview with The Print.
Jaitley responded positively, saying, "Fine, go ahead," and the process began.
Post the financial crisis, many projects that had been started earlier were in trouble. Additionally, India faced issues beyond the global financial crisis, such as corruption scandals, which caused significant delays in permissions, Rajan said.
"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," he said.
"Once the crisis hit, project timelines stretched significantly. During my predecessor's tenure, the RBI implemented a policy allowing a moratorium on declaring loans as non-performing. However, this resulted in banks holding onto large chunks of bad loans without recognising them," he noted.
"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 said.
He elaborated on initiating the Asset Quality Review, which involved examining the books of every bank to ensure consistency in treating borrowers across the banking system.
"That itself was enough to reveal a whole lot of loans, that was actually bad that were being carried on the books as performing. Of course, we had allowed some leeway for this, but they had taken more advantage than we expected," he said.
"So, a lot of bad loans came tumbling out," Rajan added.
This cleanup was necessary, the former RBI governor said. Public sector credit to the economy was declining. Without addressing these issues, banks wouldn't be able to lend further, as their balance sheets were clogged with bad loans, leaving them hesitant to extend good loans, he said.
Rajan highlighted that the asset quality review needed two hands—one from our side to recognise the bad loans and the other from the government side to capitalise the banks.
