May 31, 2023

The parliamentary estimates committee had requested Raghuram Rajan, former governor of the RBI and chief economic advisor to the UPA government, to submit his response on the NPA problem being faced by PSU banks in India. His observations have triggered a war of words between the government and the Congress. But politicking and bickering must not be allowed to deflect the issue. Rajan’s observations are incisive and provide ideas for further reforms. But the problem is that the NDA government, despite finding faults with most of the policies followed by the Congress governments of the past, has followed the same policies with minor, or sometimes major, tweaks.

Hence, it continues to recapitalize the banks that are saddled with bad loans that have all but wiped out their capital instead of thinking out of the box for a revolutionary idea. Its idea of transferring the bad assets to a new company also did not materialize. Despite trying to put bankers and other lenders in a strong position by reforming insolvency laws through the introduction of the Insolvency and Bankruptcy Code, it has not yet successfully and fully implemented it. It has also tried to follow the same old practice of pushing huge credit to sectors that it has identified. Although it is the prerogative of the government to identify sectors of the economy that it wants to grow which in turn necessitates flow of credit to those sectors, there is always the risk that fly-by-night operators take advantage of this policy. Bankers also become weak-kneed in the face of government directives and often deserving projects in other sectors suffer. Finally, if the sector fails to take-off (which often happens), banks are saddled with huge NPAs. It has happened in the past and it continues to happen. The NDA has not learnt from the faulty policies of the Congress governments.

Banks have become the playgrounds of politicians. From loans to preferred sectors and sometimes to preferred entrepreneurs – although through covert pressures – to loan waivers for sundry groups, bankers are asked to throw norms to the winds and do everything they are not supposed to do. Couple this with rampant corruption and it becomes very easy for the well-connected or the person willing to grease palms to obtain massive loans with the express intention of not paying the money back. The only hope for banks is the successful implementation of a strict insolvency code that can bring the money back to them through sale of the defaulting entity. They might not recover the loan in full but they will not have to write it off in full either.