Raghuram Rajan says bankers' optimism has led to bad loans

Raghuram Rajan, former governor of the RBI

New Delhi: More optimistic bankers, the slowing down of the government's decision-making process and the moderation of economic growth have contributed to the rise in bad debts, said the former Governor of the Reserve Bank of India in a note to a group of parliamentarians.

In a note addressed to the Chairman of the Estimates Committee, Murli Manohar Joshi, Rajan said: "Various governance issues, such as the suspicious allocation of coal mines and the fear of investigation, have slowed down the decision-making process. Delhi. Governments NDA ".

Project cost overruns have escalated for blocked projects and they have become increasingly unable to service the debt, he added, adding that the decisions made by the government n & # 39; Had not reached a sufficient pace. He added that a larger number of bad loans came from the period 2006-2008, while economic growth was strong, and that previous infrastructure projects, such as power plants, had been completed. on time and within budget.

"It's at these times that banks make mistakes. They extrapolate past growth and performance in the future. They are therefore willing to accept greater leverage in projects and to reduce the equity of developers. According to Rajan, the bank sometimes agrees to lend on the basis of project reports prepared by the promoter's investment bank, without due diligence.

Citing an example, the former governor of the RBI said: "A promoter spoke to me about how he was being sued by the banks by wielding checkbooks, asking him to name the amount that he was making. ;he wished". It was a historic phenomenon of irrational exuberance, common to all countries during such a phase of the cycle, he added.

Unfortunately, he said, growth does not always happen as expected and years of strong growth before the global financial crisis were followed by a slowdown that spilled over into the world. India, showing how much better the country was integrated into the world. Strong projections of demand for various projects have proved increasingly unrealistic as domestic demand has slowed, he added.

He also highlighted the loss of interest of promoters and bankers in the increase of non-performing assets. On the subject of embezzlement and corruption in the NPA problem, he said: "There was definitely some, but it was hard to distinguish the exuberance of bankers, incompetence and corruption ".

"Obviously, the bankers were too confident and probably did not do enough due diligence for some of these loans. Many have not done any independent analysis and have relied too much on SBI Caps and IDBI to do the right thing. Such an outsourcing of analysis has increased opportunities for undue influence, "says the note.

Regarding the steps to be taken to prevent NPAs from recurring, Rajan said there was a need to improve the governance of public sector banks and project appraisal and monitoring processes to reduce the risks of NPAs. projects. In addition, he also advocated for the strengthening of the recovery process and the removal of public sector banks from the government.

The Parliament's Budget Committee had invited Rajan to inform him after former Chief Economic Adviser Arvind Subramanian commended him for identifying the NPA crisis and trying to resolve it. Rajan, who served as RBI's governor for three years until September 2016, is currently Distinguished Professor Katherine Dusak Miller in Finance at the Chicago Booth School of Business.