FORMER Reserve Bank of India Governor Raghuram Rajan said he had submitted a list of high-profile fraud cases to the Prime Minister’s Office urging coordinated action to bring at least one or two to book.
“I am not aware of progress on this front. This is a matter that should be addressed with urgency,” said Rajan in a note submitted to Parliament Estimates Committee chaired by Member of Parliament Murli Manohar Joshi. He said the banking system has been singularly ineffective in bringing even a single “high profile fraudster to book”.
Rajan said the size of frauds in public sector banks was small, relative to the overall volume of NPAs. As far as corruption was concerned, he said instead of holding bankers responsible for specific loans, bank boards and investigative agencies must look for a pattern of bad loans that CEOs were responsible for. “…some banks went from healthy to critically undercapitalised under the term of a single CEO. Then they must look for unaccounted assets with that CEO,” he said.
According to Rajan, “government permissions and foot dragging” is one of the main reasons why NPAs occur and continue to mount. “A variety of governance problems such as the suspect allocation of coal mines coupled with the fear of investigation slowed down government decision making in Delhi, both in the UPA and the subsequent NDA governments… The continuing travails of the stranded power plants — even though India is short in power — suggests decision making has not picked up sufficient pace to date,” he said.
Looking ahead, Rajan called for caution on the new Insolvency and Bankruptcy Code with promoters testing it with continuous and, at times, frivolous appeals. “It is very important that the integrity of the (bankruptcy) process be maintained, and bankruptcy resolution be speedy, without the promoter inserting a bid by an associate at the auction, and acquiring the firm at a bargain-basement price. Given our conditions, the promoter should have every chance of concluding a deal before the firm goes to auction, but not after,” he said.
He also asked the government to focus on sources of the next crisis, and in particular, refrain from setting ambitious credit targets or waiving loans. “Credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs. Both MUDRA loans and Kisan Credit Cards, while popular, have to be examined closely for potential credit risk. The Credit Guarantee Scheme for MSME run by SIDBI is a growing contingent liability and needs to be examined with urgency,” Rajan said.
According to the former RBI Governor, resolution of stressed assets requires “concentrated attention by a high level empowered and responsible group set up by government on cleaning up the banks”, in the absence of which, “same non-solutions – bad bank, management teams to take over stressed assets, bank mergers, new infrastructure lending institution – keep coming up and nothing really moves.”
To prevent recurrence of the NPA problem, Rajan said board appointments were inevitably politicised, since – the government rather than an independent body decides this. He also pointed that the government missed out even on basic steps such as appointing CEOs on time. “… there is absolutely no excuse for banks to be left leaderless for long periods of times as has been the case in recent years,” he said.
While he blamed the banks for not carrying out independent due diligence at the time of approving loans, he said that the banks placed “excessive reliance on SBI Caps and IDBI” to do necessary due diligence. Citing reasons for NPAs, Rajan also said that unscrupulous promoters who inflated the cost of capital equipment through over-invoicing were rarely checked. “Too many loans were made to “well-connected promoters who have a history of defaulting on their loans,” he said.
Rajan said a larger number of bad loans originated in the period 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget. “It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So they are willing to accept higher leverage in projects, and less promoter equity…One promoter told me about how he was pursued then by banks waving checkbooks, asking him to name the amount he wanted. This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle.” he said.