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Former RBI Governor Raghuram Rajan has advised the Centre and State governments to eschew loan waivers stating that they are poorly targeted, which will eventually reduce the flow of credit.
Agriculture needs serious attention, but not through loan waivers, Rajan said in his detailed note on bank NPAs to the Chairman of the Parliament Estimate Committee, Murli Manohar Joshi.
“An all-party agreement to this effect (that there will be no loan waivers) would be in the nation’s interest, especially given the impending elections,” said Rajan.
Rajan said in the 17-page note that loan waivers, as the RBI has repeatedly argued, vitiate the credit culture, and put stress on the budgets of the State and Central governments.
Stating that the government should focus on the source of the next crisis, not just the last one, Rajan advised that the government, in particular, should refrain from setting ambitious credit targets or waiving loans.
He highlighted that credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs.
Rajan said that both Mudra loans as well as Kisan Credit Card, while popular, have to be examined more closely for potential credit risk.
The Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a “growing contingent liability and needs to be examined with urgency”, said Rajan.
Rajan has stressed the need for “substantial improvement” in risk management in public sector banks (PSBs). Compliance is still not adequate and cyber risk needs urgent attention.
Talent deficit
Rajan said there is already a “talent deficit” in internal public sector bank candidates in coming years because of a hiatus in recruitment in the past.
“This needs to be taken up urgently. Compensation structures in PSBs also need rethinking, especially for high-level external hires. Internal parity will need to be maintained. There will be internal resistance, but lakhs of crores of national assets cannot be held hostage to the career concerns of a few,” he said.
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