Says gave PMO list of loan frauds, no action was taken; Cong, BJP lock horns over bad loans
Former Reserve Bank of India (RBI) Governor Raghuram Rajan has blamed ‘suspect’ allocation of coal mines and slowdown in decision making by the Congress-led UPA as also the lack of urgency shown by the incumbent NDA dispensation accountable for the rising Non-Performing Assets (NPA) of the banks.
In his report to a Parliamentary panel, Rajan also disclosed he sent a list of high-profile fraud cases to the Prime Minister’s Office but was “not aware of any progress” on it.
“The RBI set up a fraud monitoring cell when I was the Governor to coordinate the early reporting of fraud cases to the probe agencies. I also sent a list of high-profile cases to the PMO urging that we coordinate action to bring in at least one or two to book. I am not aware of progress on this front. This is a matter that should be addressed with urgency,” said Rajan in his report.
Unfortunately, he said, the system had been “singularly ineffective” in bringing even a single high-profile fraudster to book. “As a result, fraud is not discouraged,” Rajan said.
It is not clear as to which regime Rajan addressed his list of high-profile cases of frauds.
The bad loan problem mainly surfaced due to slowdown in the Government’s decision making and economic growth seeing a dip along with over-optimistic bankers, he said.
“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, both in the UPA and the subsequent NDA Governments,” Rajan said in his note submitted to the Parliament’s Committee on Estimates headed by BJP leader Murli Manohar Joshi.
Rajan is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth School of Business. He served in the capacity of the RBI Governor for three years till September 2016.
The comments of the former RBI Governor, who exited after completing his tenure (not given a second term) during the Modi Government, triggered a war of words between the BJP and the Congress.
The Congress hit back on the bad loans issue saying that the Narendra Modi Government is accountable for the NPA mess. Party spokesperson Randeep Surjewala said when the UPA had left office in 2014, total (NPA)s were Rs 2.83 lakh crore and this has jumped to Rs 12 lakh crore under the NDA rule.
“This Government informed in Parliament that NPAs have gone up to Rs 10.3 lakh crore till March 2018 and it is now at Rs 12 lakh crore. So, simple mathematics tells us that Rs 9.17 lakh crore of NPAs were in 56 months of Modi Government,” he said.
He added that even if what Rajan said about bad loans originating in 2006 was considered true, they still only were 2.83 lakh crore till the UPA demitted office and this amount was manageable.
“Hold the UPA accountable for the Rs 2.83 lakh crore but will you hold the Modi Government responsible for the Rs 9.17 lakh crore?” he asked.
In his note Rajan said over-optimistic bankers and a slowdown in Government decision making, which had popularly been dubbed as “policy paralysis” before the 2014 elections were behind the mounting bad loan mess.
Stating that the economy in the period 2006-2008 was strong, Rajan said that “banks make mistakes” at such times.
“They extrapolate past growth and performance to the future. So they are willing to accept higher leverage in projects, and less promoter equity. Sometimes bank sign up to lend based on project reports by the promoter’s investment bank, without doing their own due diligence,” according to Rajan.
Citing an example, the former RBI Governor said, “One promoter told me about how he was pursued by banks waving cheque books, asking him to name the amount he wanted.” This was a historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle, he added.
Unfortunately, he said, growth does not always take place as expected and years of strong growth before the global financial crisis was followed by a slowdown, which extended even to India, showing how much more integrated the country had become with the world. Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down, he added.
He also pointed to loss of promoter and banker interest for rise in NPAs. Over malfeasance and corruption in the NPA problem, he said, “Undoubtedly, there was some, but it was hard to tell banker exuberance, incompetence, and corruption apart.”
The Parliament’s Committee on Estimates had invited Rajan to brief it on the matter after former Chief Economic Adviser (CEA) Arvind Subramanian praised him for identifying the NPA crisis and trying to resolve it.