Former RBI Governor Raghuram Rajan has traced much of the bad-loans problem that has ravaged banks to the period from 2006 to 2008, when the Congress-led UPA was in power, and has sounded a warning that the next build-up of non-performing assets (NPAs) could come from loans to Micro, Small and Medium Enterprises (MSMEs).
In his 17-page note on bank NPAs, submitted to the Parliament Estimates Committee headed by Murli Manohar Joshi, Rajan said he had forwarded to the Prime Minister’s Office (PMO) a list of “high-profile cases” and urged coordinated action to bring one or two bank fraudsters to book. It wasn’t clear if he was referring to the PMO under Narendra Modi or his predecessor,. Manmohan Singh. He wasn’t aware of the extent of progress on his list, he added.
A fraud monitoring cell — to coordinate the early reporting of cases to investigative agencies — had been set up when Rajan was RBI Governor. However, he said, the system has been ‘ineffective’ in bringing even a single high-profile fraudster to book.
Rajan also listed the main reasons for the NPA pile-up in the banking system: over-optimism of bankers; slowdown in global growth; a slowing of decision-making by Central governments, both the UPA and the NDA; and malfeasance and frauds.
Additionally, he said, stalled projects translated into cost overruns, compounding companies’ inability to service debt. Banks had extended more loans to prevent ‘zombie’ projects from turning into NPAs, he said.
Corruption, incompetence
Rajan cited “some malfeasance and corruption” as reasons for the NPA problem, but added that it was hard to separate bankers’ exuberance, incompetence, and corruption.
“Clearly, bankers were overconfident and probably did too little due diligence for some of these loans. Many did no analysis and placed excessive reliance on SBI Caps and IDBI to do the due diligence. Such outsourcing of analysis is a weakness, and multiplies the possibilities for undue influence,” Rajan said.
The slips
Rajan highlighted that a large number of bad loans originated during 2006-08, 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,” he said.
Unrealistic projections
Rajan noted that the years of strong global growth before the 2008 financial crisis were followed by a slowdown, which extended even to India. Demand projections for projects were shown to be unrealistic.