Rajan traces roots of bad loan problem

Over optimistic bankers, slowdown in government's decision-making process and moderation in economic growth mainly contributed to the mounting bad loans, former RBI governor Raghuram Rajan told a parliamentary panel.

  • Published 11.09.18
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New Delhi: Over optimistic bankers, slowdown in government's decision-making process and moderation in economic growth mainly contributed to the mounting bad loans, former RBI governor Raghuram Rajan told a parliamentary panel.

"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 a note to the chairman of estimates committee Murli Manohar Joshi.

Project cost overruns escalated for stalled projects and they became increasingly unable to service debt, he said, adding the continuing travails of the stranded power plants, even though India is short of power, suggest government decision-making has not picked up sufficient pace to date.

He further said a larger number of bad loans originated in the period 2006-2008 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 chequebooks, 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.

On malfeasance and corruption behind 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.

On steps required to prevent recurrence rising non-performing assets, Rajan suggested that there was a need to improve the governance of public sector banks and the process of project evaluation and monitoring. PTI

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