Roving Periscope: Now, even Raghuram Rajan slams UPA govt for NPAs; praises Jaitley
Virendra Pandit
New Delhi: In the ongoing season of discontent against India’s Grand Old Party (GOP), even former RBI Governor Raghuram Rajan, known for his proximity to the Congress leadership, has slammed the UPA government (2004-14) for corruption and mounting debts, and applauded the next Finance Minister Arun Jaitley for endorsing clean-up measures in the banking sector.
Dr. Rajan was the Reserve Bank of India Governor (2013 to 2016), spanning the Congress-led UPA and BJP-led NDA governments at the Centre.
According to media reports, quoting his interview with an online portal this week, he said corruption and delayed planning permits, or land and environmental clearances, contributed to the build-up of the Indian banks’ non-performing assets (NPAs) after the 2008 global financial crisis.
The asset quality review (AQR), started in 2015, led to bad loans “tumbling out” and prompted a talk with the late Arun Jaitley, then the Finance Minister, who green-signalled him to “clean up” the system, he said.
Ironically, Dr. Rajan’s relations with the NDA government, which succeeded the UPA government led by Dr. Manmohan Singh, were not viewed as good. In December 2022, he even joined Congress leader Rahul Gandhi’s “Bharat Jodo Yatra.”
“He (Jaitley) said, ‘Fine, go ahead’. We did it… but it required the government to put capital in there (and) I think we were not fast enough to put back the capital needed to resume lending…” Dr. Rajan said.
“The issue was that after the 2008 global financial crisis, many projects that started in the euphoria before the crisis were in trouble. And, of course, we had problems in India over and above the global financial crisis, which was corruption scandals and, therefore, delayed permissions for projects…”
“… they were building NPAs in the financial system, which is typical after a period of exuberance, euphoria,” he said, recalling the story of the banker who went running after an entrepreneur with a blank cheque because projects had succeeded, handsomely, before the global financial crisis.
“So, once the crisis hit and projects were delayed (and many loans became NPAs). In my predecessor’s time, a moratorium was allowed on terming them ‘non-performing.’ And, eventually, what happened was banks sitting on chunks of bad loans were not recognizing them,” he said.
In May 2024, Finance Minister Nirmala Sitharaman underlined the size of that chunk. She said banks had recovered over Rs. 10 lakh crores in bad loans between 2014 and 2023.
In posts on X, she also slammed the Congress-led UPA government which she said, “turned the banking sector into a cesspool of bad loans, vested interests, corruption, and mismanagement.”
In line with that ongoing recovery bid, this week, she said over Rs. 15,000 crore in assets, belonging to debts run up by fugitive businessmen like Vijay Mallya and Nirav Modi, were recovered.
Dr. Rajan said that when he was appointed RBI chief, he told the government, ‘Just extending it (the moratorium) is going to create more problems down the line. We need to clean up.’ The subsequent AQR looked into the books of every bank to ensure each borrower was treated the same way.
“That itself was enough to reveal that a whole lot of loans were being carried on the book as ‘performing’. We allowed some leeway but a lot of bad loans came tumbling out,” he said.
“For the AQR we needed two things. From the RBI’s side to reconsider bad loans. And from the government’s side to recapitalize banks. “So, I went to Arun Jaitley and said, ‘Look, I am warning you these have to come out. Otherwise, they will keep they system from lending.”
“Eventually the system got back on track. The key today, of course, is to make sure it (the system) doesn’t make new mistakes,” he said, also flagging the possibility of a new bad loans crisis driven by unsecured retail loans and, possibly, also by defaulting from the MSME sector.
