Policy Paralysis In UPA Years Caused Bad Loans To Pile Up, Says Raghuram Rajan, Praises Arun Jaitley
Last Updated:
Rajan, who was the RBI governor from 2013 to 2016, said an asset quality review (AQR) that started in 2015 led to bad loans ‘tumbling out’
Former RBI governor Raghuram Rajan. (FIle photo/PTI)
Policy paralysis under the Congress-led United Progressive Alliance (UPA) government was the main reason for bank non-performing assets piling up, according to former Reserve Bank of India governor Raghuram Rajan.
In an interview with The Print, he also praised the Narendra Modi government for addressing the issue from the UPA era to help banks recover through write-offs.
Rajan, who was the RBI governor from 2013 to 2016, said an asset quality review (AQR) that started in 2015 led to bad loans “tumbling out”. Following this, he spoke with the then finance minister Arun Jaitley, who gave him the go-ahead to “clean up” the system.
“He said, ‘fine, go ahead’. We did it…but it required the government to put capital in there (and) I think we were not fast enough to put back the capital needed to resume lending…” Rajan said in the interview.
Following the global financial crisis, many projects started in the euphoria before it were in trouble, he said.
“Projects weren’t getting land, environmental permissions, etc. So, they were building NPAs in the financial system, which is typical after a period of exuberance, euphoria…Once the crisis hit, project timelines stretched significantly. During my predecessor’s tenure, the RBI implemented a policy allowing a moratorium on declaring loans as non-performing. However, this resulted in banks holding onto large chunks of bad loans without recognising them,” he noted. “The moratorium ended during my first year in 2014, and we realised that extending and pretending would create bigger problems down the line. Historically, this approach has always led to issues, so we needed to clean up.”
Finance minister Nirmala Sitharaman this year lambasted the Congress-led UPA government that she said “turned the banking sector into a cesspool of bad loans, vested interests, corruption, and mismanagement”.
