Former Reserve Bank of India (RBI) Governor Raghuram Rajan.
Former Reserve Bank of India (RBI) Governor Raghuram Rajan has warned that MUDRA and Kisan Credit Cards were a potential credit risk and the government should refrain from setting ambitious credit targets or waiving loans.
The credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future non-performing assets (NPAs).
In a detailed 17-page written note to the Estimates Committee of Parliament, the former RBI Governor says, “Both MUDRA loans as well as the Kisan Credit Cards, while popular, have to be examined more closely for potential credit risk. The Credit Guarantee Scheme for MSMS (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency.”
The Estimates Committee is headed by Bharatiya Janata Party’s (BJP) veteran parliamentarian Murli Manohar Joshi.
Warning against loan waivers, Rajan said it vitiates the credit culture and stress the budgets of the waiving State or Central government. They are poorly targeted, and eventually reduce the flow of credit.
Agriculture needs serious attention, but not through loan waivers. “An all-party agreement to this effect would be in the nation’s interest, especially given the impending elections,” he added.
The former RBI governor has favoured a mix of out of court restructuring and bankruptcy process for speedy disposal of the NPAs. The former requires protecting the ability of bankers to make commercial decisions without subjecting them to inquiry.
The latter requires steady modifications where necessary to the bankruptcy code that is effective, transparent, and not gamed by unscrupulous promoters.
Bankruptcy court should be a final threat and much loan renegotiation should be done under the shadow of the bankruptcy court, not in it. This requires fixing the factors that make bankers risk averse and promoters uncooperative, he observed.
“We need concentrated attention by a high level empowered and responsible group set up by government on cleaning up the banks. Otherwise the same solutions (bad bank, management teams to take over stressed assets, bank mergers, new infrastructure lending institution) keep coming up and nothing really moves.
Public sector banks are losing market share as non-bank finance companies, the private sector, and some of the newly licensed banks are expanding,” Rajan cautioned.
Tracing the emergence of the NPAs, he said it could be attributed to historic phenomenon of irrational exuberance, common across countries. A large number of bad loans were originated in 2006-08 when the infrastructure projects were completed on time and within budget as there was an economic boom.
“The banks make mistake at such times. They extrapolate past growth and performance to the future. They accept higher leverage in projects and less promoter equity,” he pointed out.
Rajan also dwelt with rise in bank frauds, saying though still small relative to volume of NPAs it needs to be addressed with urgency.
The former RBI Governor rejected the contention that credit growth slowed down due to recognition of the NPA problem. The public sector bank credit slowdown to industry dates from early 2014 suggests that the bank cleanup, which started in earnest in the second half of FY 15 was not the cause.
“The slowdown is best attributed to over-burdened public sector bank balance sheets and growing risk aversion of public sector bankers. Their aversion to increasing their activity can be seen in the rapid slowdown of their deposit growth,” he asserted.