Raghuram Rajan is back in the news again. Just recently, the NITI Aayog chief, rather ludicrously, blamed the former RBI Governor for the slowdown in the economy. This time, Rajan, through his 17-page note to the Parliamentary panel on bank NPAs, headed by BJP veteran Murli Manohar Joshi, did some plain speaking on the issue.
Rajan said the bad loan mess originated in the 2006-08 period, during the UPA regime, when the economy was witnessing a boom. He said since the growth rates were high, many banks lent money to long-term projects without doing adequate due diligence. The bankers “irrational exuberance” made them believe the good times would last forever and pushed them take these risky loan decisions. What followed was the global financial crisis, which slowed down growth, leading to a “policy paralysis” that gripped both the UPA and the NDA governments, worsening the situation.
To quote Rajan, “Clearly, bankers were overconfident and probably did too little due diligence for some of these loans”.
List of big-ticket defaulters
Rajan dropped another bombshell. He said that he had given a list of big-ticket defaulters to the Prime Minister’s Office, urging it to bring one or two defaulters to book. Though Rajan did not specify whether the PMO he submitted the list to was of the present Modi government or the erstwhile Manmohan Singh government, the lack of action on this front is disturbing.
He further said the fraud monitoring cell, set up during his stint at the RBI, was ineffective in bringing even a “single high-profile fraudster to book”.
Rajan’s revelations predictably led to a political boxing match between the Congress and the BJP. The BJP was quick to blame the Congress-led UPA regime for starting the bad loan mess. The Congress, on its part, said the NPA problem, which was “sustainable” till it was in power, went out of control after the NDA took charge. It also criticised the PMO for “shielding” some of the defaulters and allowing them to escape the country.
Both regimes to blame
Rajan’s observations leave little doubt that both the UPA and the NDA are culpable for the precarious state of our banking system. Though Rajan said there was “some malfeasance and corruption” that led to rising NPAs, he also admitted that it was hard to separate over-exuberance from incompetence and corruption.
Though much of the media attention was focused on the NPA situation and the political fallout, Rajan’s crucial observations on the business class, and how some sections of it went about systematically defrauding the system, has unfortunately not got the coverage it deserved.
Rajan was scathing in his attack on some businessmen saying, “unscrupulous promoters who inflated the cost of capital equipment through over invoicing were rarely checked. Public sector bankers continued financing the promoters even while private sector banks were getting out. Finally too many loans were made to well-connected promoters who have a history of defaulting on their loans”.
He goes on to say that, “Until the Bankruptcy Code was enacted, promoters never believed that they were under serious threat of losing their firms. Even after it was enacted some are still playing the process hoping to regain control through a proxy bidder, at a much lower price.”
Businesses in poor light too
These observations show the business class, or at least some sections of it, in very poor light. Clearly, a section of businessmen used its political connections to get huge loans. Even when the banks were staring at defaults, these politically-connected businessmen could roll over their loans as writing them off would be a gift to them and invite investigation into the bankers.
When it comes to corruption, the finger is almost reflexively pointed towards the political class. Though this is not unjustified, corporate corruption has not received the attention it deserves, except, of course, in high-profile cases, such as the Satyam scandal, or those related to Vijay Mallya or Nirav Modi. The nexus between the political system and the business class in the country runs deep. In some instances, high-profile businessmen have also directly jumped into the political fray. This is true of national as well as regional parties.
The business class has also been one of the biggest donors to political parties since the 1970s. Earlier, during the “licence-permit raj”, sections of the business class that funded political parties got favourable treatment from the government regarding grant of licences. The scrapping of the “licence-permit raj” was supposed to have put an end to this. But the opening up of the economy in 1991 only led to a tighter embrace between the business and political classes. “Influence peddling” by the business class only seems to have grown in the last two decades. Given how expensive fighting elections has become, politicians’ dependence on businesses for funds only seems to have grown.
The NPA mess is perhaps a symptom of this malaise.