Former RBI Governor Raghuram Rajan have blamed Over-optimistic Bankers and slowdown in Government decision making policy for increase in Bad loans in his reply to Parliamentary committee. While submitting a note to the Chairman of Estimates Committee, he said that there were governance problems like suspect allocation of coal mines and fear of proper investigation that leads to the slowdown of the government policy both in the UPA and NDA Government.
According to estimates, Indian banks are currently burdened with bad loans that amount to more than Rs 10 lakh crore.
Rajan said that too many loans were granted to well-connected promoters who have a history of defaulting on their loans. He particularly faulted public sector banks, saying that Public sector bankers continued financing promoters even while private sector banks were getting out of financing the said promoters. He also blamed public sector banks for inadequate due diligence before and after handing out loans.
He further said that the bad loans were largely originated in the period 2006 -2008 when economic growth was strong and previous infrastructural projects had been completed on time. He claimed, “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.”
Another reason, he highlighted was the bankers fear that they will be subject to harassment by the investigative agencies if they label a transaction as fraud. Rajan blamed banks for this mega NPA crisis, labeling the handing out of loans as a “historic phenomenon of irrational exuberance”.
He told that RBI should have gone for Asset Quality Review (AQR) process earlier and that it should have been more decisive in enforcing penalties on non-compliant banks. He also shared that the culture of leniency at the RBI has been getting change in recent years.”