Raghuram Rajan's prescription to avoid NPAs: move PSU banks away from government

Timely appointments of senior management and improved governance in PSU banks can help prevent a future build-up of NPAs. Photo: Nathan G./Mint

New Delhi: Removing public sector banks from the government, quickly appointing senior management and improving the governance of these institutions – including stronger advice – are some of the measures prescribed by the former Governor of the Reserve Bank of India (RBI). to prevent future construction. in non-performing assets (NPA).

In a note on NPAs in the Indian banking system addressed to the parliamentary estimates commission headed by Murli Manohar Joshi, Rajan criticized the United Progressive Alliance (UPA) led by Congress and the National Democratic Alliance for their role in the NPA crisis.

The note was published on the website of the Booth School of Business at the University of Chicago.

"The boards of public sector banks are still not professional enough and the government, rather than a more independent body, still decides on appointments to the board, with the inevitable politicization. The government could follow more closely the committee report P.J. Naik. Finally, strong boards of directors should be responsible for all decisions but be held accountable, "said Rajan, adding that" banks have absolutely no reason to stay leaderless for long periods of time. years ".

Rajan pointed out that the retirement date for CEOs is well known and that the government should be prepared well before the succession. "Indeed, it would be good if the former CEO and the successor overlap for a few months while they exchange notes," he said.

Rajan also voted for external talent to be integrated into senior management of state-owned banks, as well as to rethink pay structures in light of external hiring. It also sought to improve the project appraisal and monitoring process to reduce the risks associated with project NPAs while also pointing out the risks associated with NPAs of government schemes such as Mudra and Kisan credit cards.

"The government should focus on the sources of the next crisis, not just on the last one. In particular, the government should refrain from setting ambitious credit targets or giving up loans. Credit objectives are sometimes achieved by abandoning the appropriate due diligence, creating an environment for future NPAs. MUDRA loans as well as the Kisan credit card, although popular, need to be examined more closely regarding potential credit risk, "Rajan said.

In retrospect, Rajan said the regulator could probably have issued more red flags on loan quality. "What was the regulator doing better? "It is difficult to propose an objective self-evaluation. However, RBI probably should have raised more flags on the quality of loans at the beginning of the bank exuberance. In hindsight, we probably should not have accepted an abstention, but without the tools to clean it up, the banks would not have understood what they would have done, "said Rajan, adding that the promulgation of the Insolvency code have been faster.

"The RBI could have been more decisive in applying the sanctions to the non-compliant banks. Fortunately, this culture of clemency has evolved in recent years, "said Rajan.