Rajan's mantra to rein in NPAs includes a closer examination of Mudra loans

In his reply to a parliamentary panel questionnaire on bank NPAs, or non-performing assets, former Reserve Bank of India (RBI) governor Raghuram Rajan has prescribed a closer examination of Mudra loans and Kisan Credit Cards to prevent an NPA crisis in the future.

The Parliamentary Committee on Estimates, which is headed by senior Bharatiya Janata Party (BJP) leader Murli Manohar Joshi, had sought Rajan’s views on the NPA crisis.

The request had come from the estimates committee after former chief economic adviser Arvind Subramanian in his deposition to the committee said that Rajan had identified the NPA issue early in his tenure at the RBI.

In his 17-page reply dated September 6, which Rajan has also posted on his website, he said the RBI during his tenure had set up a monitoring cell to check bank frauds to coordinate the early reporting of fraud cases to investigative agencies. “I also sent a list of high-profile cases to the PMO urging that we coordinate action to bring at least one or two to book. I am not aware of progress on this front,” Rajan said.

To prevent future NPA crisis, Rajan advised that government should refrain from setting ambitious credit targets or waiving loans. Rajan said that there should be an “all-party agreement”, especially given the impending elections, which while recognising that agriculture needed serious attention, should agree that it shouldn’t be through loan waivers.

On the role of corruption in creating the NPA problem, Rajan said he would hesitate to say that corruption was a significant element in creating NPAs “unless we can determine the unaccounted wealth of bankers”. Rajan said instead of attempting to hold bankers responsible for specific loans, bank boards and investigative agencies “must look for a pattern of bad loans that bank CEOs were responsible for” as some banks went from healthy to critically undercapitalised under the term of a single CEO. “Then they must look for unaccounted assets with that CEO. Only then should there be a presumption that there was corruption,” Rajan said.

Rajan, who is currently with the University of Chicago Booth School of Business, said most of the loans that turned NPAs were given between 2006 and 2008. He pointed to over-exuberance of banks, who overestimated the future growth of the Indian economy, but the global slowdown of 2008 belied these estimates and lack of due diligence contributed to the mess. He said subsequently a variety of governance problems, such as the suspect allocation of coal mines coupled with the fear of investigation slowed down the government's decision-making in Delhi, both in the UPA and the subsequent NDA governments.

Rajan said 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,” he said.