Rajan blames over-optimistic bankers, slowdown in govt decision-making for rising bad loans

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New Delhi, September 11: Over-optimistic bankers, slowdown in the government decision-making process and moderation in economic growth mainly contributed to the mounting bad loans, former RBI Governor Raghuram Rajan has said in a note to a parliamentary panel.
In a note to Chairman of Estimates Committee Murli Manohar Joshi, he 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 the stalled projects and they became increasingly unable to service debt. The continuing travails of the stranded power plants even though the country was short of power, suggested that government decision-making had not picked up sufficient pace to date.
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, he noted.
“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 was the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle, he said.
Unfortunately, he said, that growth did not always take place as expected and the years of strong global growth before the global financial crisis were followed by a slowdown, which extended even to India, showing how much more integrated the country had become with the world. Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down, he said.
Rising non-performing assets
He pointed to loss of promoter and banker interest for the rise in non-performing assets (NPAs). Over malfeasance and corruption were part of the NPA problem. “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. Such outsourcing of analysis is a weakness in the system, and multiplies the possibilities for undue influence,” the note said.
On steps required to prevent recurrence rising NPAs, Mr. Rajan said there was need for improving the governance of public sector banks and the process of project evaluation and monitoring to lower the risk of project NPAs. Besides, he also made a case for strengthening the recovery process and distancing public sector banks from the government.
The parliamentary panel had invited Mr. Rajan to brief it on the matter after former Chief Economic Advisor (CEA) Arvind Subramanian praised him for identifying the NPA crisis and trying to resolve it.
Rajan, who was the RBI Governor for three years till September 2016, is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth School of Business. (PTI)