'Go ahead': What Arun Jaitley told Raghuram Rajan on tackling bad loans

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Corruption and delayed planning permits, or land and environmental clearances, contributed to the build-up of non-performing assets - post the global financial crisis - on Indian banks' books, former Reserve Bank chief Raghuram Rajan said Wednesday in an interview with an online newspaper.


Mr Rajan, the RBI Governor from 2013 to 2016, said an AQR, or asset quality review, started in 2015 led to bad loans "tumbling out", and prompted a talk with the late Arun Jaitley, then the Finance Minister; Mr Rajan told The Print Mr Jaitley gave him the greenlight 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..." he said.


"The issue was that post the global financial crisis many projects started in the euphoria before the crisis were in trouble. And, of course, we had problems in India over and above the global financial crisis, which was corruption scandals and, therefore, delayed permissions for projects..."


"... they were building NPAs in the financial system, which is typical after a period of exuberance, euphoria," he said, recalling the story of the banker who went running after an entrepreneur with a blank cheque because projects had succeeded, handsomely, before the global financial crisis.


"So, once the crisis hit and projects were delayed (and many loans became NPAs). In my predecessor's time a moratorium was allowed on terming them 'non-performing'. And, eventually, what happened was banks sitting on chunks of bad loans were not recognising them," he said.


In May, Finance Minister Nirmala Sitharaman underlined the size of that chunk; she said banks had recovered over Rs 10 lakh crores in bad loans between 2014 and 2023.

READ | 

Banks Recovered Over 10 Lakh Crore Bad Loans In 9 Years: Centre


In posts on X, Ms Sitharaman also slammed the Congress-led UPA government that she said "turned the banking sector into a cesspool of bad loans, vested interests, corruption, and mismanagement".


The Banking sector is considered the backbone of a nation's economy. Recently, India's banking sector achieved a significant milestone by recording its highest-ever net profit, crossing ₹ 3 lakh crores.

This is in stark contrast to the situation before 2014 when @INCIndia-led…
— Nirmala Sitharaman (@nsitharaman) May 31, 2024



And, in line with that ongoing recovery bid, this week she said over Rs 15,000 crore in assets belonging to debts run up by fugitive businessmen like Vijay Mallya and Nirav Modi.

READ | 

14,000 Crore Of Mallya's Assets Restored To Banks: Centre


Mr Rajan said that when he was appointed RBI chief, he told the government, 'Just extending it (the moratorium) is going to create more problems down the line. We need to clean up'. The subsequent AQR looked into the books of every bank to ensure each borrower was treated the same way.


"That itself was enough to reveal that a whole lot of loans were being carried on the book as 'performing'. We allowed some leeway but a lot of bad loans came tumbling out," he said.


For the AQR we needed two things, Mr Rajan said. From the RBI's side to reconsider bad loans. And from the government's side to recapitalise banks. "So, I went to Arun Jaitley and said, 'Look, I am warning you these have to come out. Otherwise, they will keep they system from lending."


"Eventually the system got back on track. The key today, of course, is to make sure it (the system) doesn't make new mistakes," he said, also flagging the possibility of a new bad loans crisis driven by unsecured retail loans and, possibly, also by defaulting from the MSME sector.