Raghuram Rajan was RBI governor for three years till September 2016. (File)
Overoptimistic bankers, government “foot-dragging” and slow growth were factors in mounting bad loans, former RBI governor Raghuram Rajan has said in a detailed note to a parliamentary panel.
Raghuram Rajan’s report also suggests, as prevention: “Improve governance of public sector banks and distance them from the government”.
In a note to the chairman of the parliament’s Estimates Committee, Murli Manohar Joshi, Raghuram Rajan 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”.
Project cost overruns escalated for stalled projects and they became increasingly unable to service debt, he said. “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 says.
A larger number of bad loans originated in the period 2006-2008, said Mr Rajan, when economic growth was strong and previous infrastructure projects such as power plants had been completed on time and within budget.
“It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So, they are willing to accept higher leverage in projects, and less promoter equity. Indeed, sometimes banks signed up to lend based on project reports by the promoter’s investment bank, without doing their own due diligence,” he said.
Citing an example, he said “one promoter told me about how he was pursued then by banks waving cheque books, asking him to name the amount he wanted”.
This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle, he said.
Years of strong global growth before the global financial crisis were followed by a slowdown that extended even to India, he said. “Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down.”
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 is hard to tell banker exuberance, incompetence, and corruption apart”.
“Clearly, bankers were overconfident and probably did too little due diligence for some of these loans. Many did no independent analysis, and placed excessive reliance on SBI Caps and IDBI to do the necessary due diligence,” the note said.
He also tackled criticism of his policy to identify NPAs, saying the claim was “ludicrous” and made by people who have not done their homework.
Stating that “hindsight is 20/20”, Mr Rajan said the RBI “should probably have raised more flags about the quality of lending in the early days of banking exuberance.”
He added: “The RBI could have been more decisive in enforcing penalties on non-compliant banks. Fortunately, this culture of leniency has been changing in recent years.”
The Parliament’s Committee on Estimates invited Mr Rajan to give a briefing after former Chief Economic Advisor (CEA) Arvind Subramanian praised him for identifying the NPA crisis and trying to resolve it.
Mr Rajan was RBI governor for three years till September 2016. He is currently at Chicago Booth School of Business.