Raghuram Rajan, economist and former Reserve Bank of India Governor has been a darling of the opposition because of his sour bonding with Modi govt when he was central bank chief. However, in his latest remark he lauded the Modi government for managing the Non Performing Assets (NPA) effectively which according to him burgeoned during Congress-led UPA regime due to corruption.
While talking to The Print, Rajan said that it was in 2015 that the Asset Quality Review (AQR) started which led to reduction in NPA simply because the review helped in effectively tackling the potential NPA accounts.
He said that banks provided loans to projects which succeeded before the global economic crisis of 2008 but failed to perform after that because of corruption, delay in planning and permit, land and environment clearances which contributed to NPAs.
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…”
He further added that banks provided a moratorium to these bad loans due to which the accounts were not marked as NPA but financial insecurity was actually mounting over the public sector banks.
Rajan explained it by saying, “What happened was banks sitting on chunks of bad loans were not recognising them.”
Talking about the government, he said that he went to Arun Jaitley (then Finance Minister) with a proposal of AQR and ending of moratorium to which Jaitley replied, “Fine.. Go ahead.”
He said that eventually the situation is back on track. Coming from Rajan, the appreciation of RBI means that it has done a tremendous job.
To understand that, it is imperative to go through the recent statement of Finance Minister Nirmala Sitharaman where she gave figures of reduction in NPAs.
On May 31, she said that banks have recovered more than ₹ 10 lakh crores from bad loans between 2014 and 2023, as part of the reforms process implemented by the Modi government.
As per the June Financial Report this year, the gross NPA declined to 12 year low. It stood at 2.8 percent at the end of fiscal year 2024.
How did the government manage to pull this?
As stated by Rajan, AQR helped a lot in rectifying the bad loans and ending the moratorium was a key step to containment and remediation.
However, the Modi government has since then taken various steps.
- The most important among them is the Insolvency and Bankruptcy Code (2016). With this, the government and RBI brought change in the credit line. The key provision of the code was to take away the control of the defaulting company from promoters/owners, and debarring wilful defaulters from the resolution process. The guarantor is also brought under the ambit of IBC to make it even more effective.
- Among other initiatives, the government also amended the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 (SARFAESI Act 2002). The act basically allows the lender to auction properties of defaulters.
- Similarly, National Asset Reconstruction Company Limited (NARCL) was set up to resolve stressed assets above Rs. 500 crore. Moreover, the government approved extending up to Rs 30,600 crore guarantee to back NARCL receipts which it provides to lending institutions for acquiring stressed assets.
- To deal with NPA, Stressed Asset Management Verticals were set up by Public Sector Banks (PSB) like SBI to recover, monitor loans.
- Under the reforming agenda for PSBs, the RBI led the successful establishment of automated Early Warning Systems (EWS) in banks for time-bound remedial actions in the potentially defaulting accounts.
- The RBI also imposed strict sanctions on wilful defaulters by not extending them any additional facilities. They also get debarred from accessing capital markets to raise funds.
- Prudential Framework for Resolution 2019 was also a key initiative for getting early recognition and time bound resolution.
