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The Raghuram Rajan Note

Raghuram Rajan, the former RBI governor, who was too independent minded to suit the requirements of the BJP, has been a polarising figure of sorts, for the BJP itself. One section of the BJP, which includes the likes of Gurumurthy, the swadeshi ideologue of the RSS dislike him, and so does Mr. Rajiv Kumar, the vice chairman of the Niti Ayog. But others like Murli Manohar Joshi and Arvind Subramanian, the outgoing CEA of India, have admiration for his professional abilities. Due to his stellar credentials, though Rajan has gone back to his teaching job at Chicago, he yet continues to hover around the Indian policy makers. His recent comeback to the newspaper headlines in India, started with the CEA Arvind Subramanian praising him before the Parliamentary Committee headed by the senior BJP leader Mr. Murli Manohar Joshi, for having identified the NPA crisis and triggering its disclosure by banks. That led to Mr. Murli Manohar Joshi, requesting Mr. Rajan to appear before the committee to explain the roots of the NPA crisis, its build up and its solution. Rajan was requested to at least forward his expert written opinion, in case he was unable to appear before the Parliamentary Committee.

Raghuram Rajan did send a note as per Mr. Joshi’s request, outlining his expert views on the genesis, journey and the solution to the NPA crisis, that is so huge that it defies a solution at the moment. His note mentions the reasons for the NPAs, the restructuring schemes set up by the RBI to resolve the NPAs, the need to recognise bad loans, whether the RBI created the NPAs, whether the NPA recognition slowdown the credit growth and economic growth, the reasons why NPAs continue to mount and how do we prevent their recurrence. In his note Rajan cautions the government of the budding NPA crisis in the Mudra loans and the Kisan Credit Cards and the futility of loan waivers.

The key issue is that the huge NPA crisis has already occurred and India has lost over Rs.10 lac crores. While this matter needs to be resolved by recovery of loans and the most strictest possible punishment to the fraudsters and the wilful defaulters, the major issue going forward is how do we prevent the recurrence of such huge NPAs. Rajan prescribes the solution for this too and says at the outset that we must improve the governance of public sector banks and must distance them from the government. He rightly says that public sector bank boards are still not adequately professionalised and the government, rather than an independent body decides bank board appointments, with inevitable politicisation. He further says that banks need to improve the process of project evaluation and monitoring to lower the risk of NPAs. All this needs to be duly supported by further strengthening the recovery process. Rajan’s parting advice is that the government must focus on the sources of the next NPA crisis and not the previous one, for which he says that in particular, the government must refrain from setting ambitious credit targets or waiving loans. The sum and substance of Rajan’s expert advice is that political interference in banks must stop immediately, or else the next credit crisis will certainly recur.  No Indian politician has heeded to such obvious sage advice, since the days of bank nationalisation.

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