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Raghuram Rajan note to parliamentary panel slams UPA mistakes; Congress blaming Modi for NPAs is bunkum

Dinesh Unnikrishnan
Rajan's letter on NPA is a big eye-opener on the Indian economy; blaming the mess on Modi will be Congress' mistake

The political controversy over Raghuram Rajan's note to Parliament committee chaired by Murli Manohar Joshi on the bank NPA problem is designed to divert the attention from the very problem itself to a useless mud-slinging show.

Looking beyond the political optics of it, the Rajan letter is a clear-cut condemnation of the UPA-era mistakes that created one of the biggest bad loan mess in the country, when, in Rajan's own words, banks chased promoters "waving cheque books, asking him to name the amount he wanted". That's where the problem began, slowly evolved to an accepted systemic ill that no one (including regulators) dared to question for long. The very concept of professional accountability was laughed at and the problem finally returned to haunt the very banks with hellish might.

Looking at the facts, there is a big irony in the Congress blaming Prime Minister Narendra Modi for the NPA mess and inaction over corporate loan fraud alert because it was during UPA I and II that all the alleged fraudsters were welcomed wholeheartedly with the blessings of the political leadership and went to on do business, be it Vijay Mallya, Nirav Modi or Mehul Choksi or anyone else. That none of them could be caught so far and dragged into Indian jails even after the Modi-government came into power is no exoneration for the Congress and UPA to pass the buck shamelessly to the NDA; at least not on this issue.

As Rajan said, the seeds of the present bad loan crisis were planted between 2006-08, when the UPA functioning led to increased NPAs in India's banking structure. In fact, the analogy Modi used once, 'phone banking' is apt to describe this era. It was not uncommon in those days for banks to get calls from North Block and the aides of other political bosses -- be it big or small, directing banks to give loans to a specific promoter or group.

The banking system, with 70 percent of the assets under government control, had to religiously follow the unofficially official diktats both during UPA I and II and give away the money. This led to banks being infected with the NPA illness' to its present critical state, all under the watch of the Congress government. The Congress could have corrected the problem, but no one acted because state-run banks were deemed to be piggy banks of politicians. Some bankers received kickbacks ranging from something as small as a watch or a gold ornament to a few who got promises of post-retirement berths.

In fact, there was hardly any need of political nudging for public sector bankers to open their doors for unworthy borrowers; they were willing anyway. The high economic growth phase, as Rajan said, had made most bankers blind about hidden future risks. They merely looked at past performance of companies and extrapolated it to the future to decide on loans. Also, they expected the then near double-digit economic growth to continue forever creating enough cash flows for all firms to pay back loans. In many instances, most bankers only looked at the names and sanctioned loans -- Vijay Mallya is one big example.

When the Kingfisher Airlines fraud broke out, this writer recalls a banker who was formerly with the State Bank of India (SBI) mentioning: Who could have said 'No' to someone like Mallya?

Remember, this was when even a child with some sense of airline business knew Kingfisher has no future and its finances were in an incurable state. Bankers even accepted 'goodwill' and 'brand name' in the list of collateral, Mallya's personal guarantee was enough to give away a few thousands of crores. Besides all this, there was a mad competition between bankers to show a bigger loan book to the government.

Flashing total business figures in the mastheads of major newspapers was a common sight (which by the way offered no indication of the quality of business of the bank but just a ballooned figure). Every banker wanted a bigger share of the corporate loan at the first indication of the demand. Golden rules of lending were given a convenient back-burner space and prudence went missing for many years. This is what the promoter who spoke to Rajan might have meant when he said bankers were chasing him waving blank cheque books.

When such serious lapses were permitted and colluded to build up a major banking NPA crisis, it is ironical for the Congress-UPA to pass the buck to Modi. What is even more ridiculous is the Congress party blaming the sharp surge in NPAs during Modi-rule. This is another serious case of misunderstanding of the issue or confusing tactics on the NPA problem.

NPAs spiked sharply because finally, after a decade of lazy and irresponsible banking and constant ever-greening of loans, banks were made to call a spade a spade and state bad loans as bad loans.

Just merely putting on a nice outfit to hide the rot beneath won't make anyone healthy; that's what precisely banks did all the time till Raghuram Rajan's Reserve Bank of India (RBI), with the backing from the Modi-government, unleashed the biggest-ever bad loan clean-up process in 2014-15 with the introduction of a paper on early identification of stressed assets and eventually setting a deadline for banks to declare all their NPAs . Of course, this was a shocker and a deep surgery but much-needed for a deeply ill banking system. This is what made it appear that there was a sudden spurt in NPAs>.

But, for the sake of economy, this clean-up had to happen at some point. Hence, it is illogical for Rahul Gandhi and P Chidambaram to blame Modi for the spike in NPAs.  In fact, it is during the Modi-rule that the Indian banking system was witness to some of the biggest steps to correct the long-standing ills of the sector by bringing in the Insolvency and Bankruptcy Code (IBC) and making corporate loan frauds a central issue. It didn't choose to hide the problem and adopt the typical bureaucratic approach but decided to take the bull by the horns. The tools for bad loan recovery and identification of stressed assets sharpened.

Tackling corporate loans could not have been conducted by way of government orders but only through bank-specific investigations, courts and IBC courts. Rajan's letter to the panel on NPAs is a big condemnation of the UPA-era bad loan-making programme and the Congress party blaming Modi for the NPA problem is bunkum.

Also See: Over-optimistic bankers, growth slowdown responsible for bad loans: Raghuram Rajan tells Parliamentary panel

Demonetisation did not slow down the economy but Raghuram Rajan's policies on NPAs did, says NITI Aayog's Rajiv Kumar

Steering banking system through demonetisation, NPA challenges, Urjit Patel has emerged stronger in two years

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