Mumbai: Former Finance Minister Encouraged Decisive Action

In a recent interview, former RBI governor Raghuram Rajan revealed that ex-finance minister Arun Jaitley had given the go-ahead for cleaning up bad loans of Indian banks. Rajan emphasized that the build-up of non-performing assets (NPAs) in the banking sector, worsened by corruption, delayed clearances, and the global financial crisis, necessitated a comprehensive review.

"When I discussed the need to clean up the system with Jaitley, he said, 'fine, go ahead'... We did it," Rajan told a digital news platform. However, he highlighted the slow pace of recapitalisation by the government, which hindered the resumption of lending by banks.

Rajan, who was RBI governor from 2013 to 2016, also mentioned the problems in India beyond the global financial crisis, including corruption scandals, delays in permissions, and difficulties in obtaining land and environment permissions for projects, which contributed to the build-up of NPAs in the financial system.

The RBI initiated an asset quality review (AQR) in 2015, which exposed significant bad loans that had been carried as performing assets. Rajan said, "Many loans became NPAs after the crisis and delays in projects. During my predecessor's time, a moratorium was allowed on terming them non-performing, but it only prolonged the problem." While the system eventually stabilised, he emphasised the importance of avoiding a repeat of past mistakes, particularly in retail and MSME loans.

The AQR turned out to be the biggest clean-up in Indian banking history with lenders posting losses worth crores and facing lending curbs. In a recent war of words with Congress's Rahul Gandhi, Finance Minister Nirmala Sitharaman said it was during the UPA government that bank employees were harassed and forced to give loans to cronies through "phone banking" by the then government functionaries.