Why Rajiv Kumar, Vice Chairman, NITI Aayog is right about Raghuram Rajan

Before we come to what Rajiv Kumar reportedly said, it is not demonetisation but the rising NPA problem which hampered the GDP growth. Let us first look at how the Indian economy was growing to understand the background.

As depicted in the graph above, riding on the growth trajectory set by the government in 2004, India continued to grow at around 8-9% growth rate (at constant prices) before the recession hit the global economy in 2008. However, Indian economy survived the slowdown and continued to maintain the growth at around 8% until 2010-11. But, banks instead of provisioning for possible shockwaves of the recession on Indian economy continued to lend money indiscriminately so much so that loans increased from approximately 18.16 lakh crores to 52.15 lakh crores between 2008 and 2014.

But as the domino effect of the global recession of 2008 started impacting India. The economy started slowing down. GDP growth rate also started falling after 2011 reaching as low as 4.74 % (provisionally) in 2013-14 as shown in the first graph. Profitability of businesses decreased and policy paralysis ridden governance led to stalling of projects. Consequently, these indiscriminately disbursed loans started turning into NPA. Banks which were not able to recover loans started a practice which was reported as ‘Evergreening of loans’ i.e. tactics which did not let these hurriedly given or ‘phone banking’ loans reflect as NPA in their balance sheets in order to keep the images of the banks and government clean.

Rajan was made the honorary economic advisor in 2008 and economic advisor to government of India in 2012 before being appointed as the RBI governor in 2013 amidst the much media fanfare, one of the headlines in The Hindu said, “Raghuram Rajan starts with a bang”.

With full-fledged banking crisis looming large over Indian economy in 2013, he had the task of curbing the rising NPA among others. He thus launched the schemes adding to some already existing schemes that enabled the restructuring of stressed assets to tackle the problem of NPA.

Some of the schemes launched during his tenure are mentioned below.

  • 5/25 Refinancing of Infrastructure Scheme
  • Scheme for Sustainable Structuring of Stressed Assets
  • Strategic Debt Restructuring Scheme
  • Asset quality review

 Chronology of actions taken by RBI to tackle the problem of rising NPA is shown in the figure below.These restructuring measures allowed banks to further continue putting their stressed assets under the carpet. Consequently, NPA kept rising and with recovery becoming difficult each passing day. Banks and borrowers both started feeling the heat. It is these mechanisms which allowed the structuring and restructuring of stressed assets without posing an effective check on banks and borrowers, led to piling up of NPA. Measure to assess the Assets under AQR was operationalised as late as in October 2015, two years after his coming to office.

This piling up of NPA hurt the ‘investment’ in the country leading to growth also getting hampered as banks due to rising NPA stopped the further lending and businesses started becoming debt-ridden due to stalled projects. They were not able to make enough profits to pay the banks back. This problem was first acknowledged as the “Twin Balance sheet Problem” in the economic survey of 2015-16 and was further explained in the economic survey of 2016-17.

Economic Survey 2016-17 said, 5/25 Refinancing of Infrastructure scheme by RBI enabled, banks to extend additional loans (evergreening). This in turn aggravated the initial problem. Even commenting on Strategic Debt Restructuring Scheme, it said, “as of end-December 2016, only two sales had materialized, in part because many firms remained financially unviable since only a small portion of their debt had been converted to equity.”

Failure of Rajan’s schemes to address NPA problem was also reported in media too as one of the headlines in Business Today said that “Why RBI’s strategic debt restructuring scheme has turned out to be a damp squib”.

Following a set precedent of not sacking the RBI governor despite his policies not being effective, government finally responded by enacting the Bankruptcy and Insolvency code in 2016 to take a final call on stressed assets which required either to liquidate them or giving them to other efficient Business groups who can convert them into the profitable ventures and thus banks loans can be paid back. And, measures to structure and restructure the stressed assets were withdrawn as they were not effective and in fact, allowed lenders to continue with their evergreening tactics.

Thus, lack of proactive action, systematic policy intervention and constant obsession with the restructuring of loans (evergreening) approach led to huge rise in NPA. This had its impact on the growth. Analysis of Rajiv Kumar, VC, NITI Aayog that rising NPA has caused the low GDP growth has also been reported by others.

RBI as per its own preamble has a basic function to operate the currency and credit system of the country to its advantage”. Raghuram Rajan continued to sit on the NPA without taking any sound policy decision to tackle this challenge. In the absence of any timely checks from the RBI on the banks which kept on restructuring their assets even during Raghuram Rajan’s term ensured that NPA rose to mind-boggling 7 lakh crores by the time he left in September 2016. With this piling up of NPA, as already explained above, both the borrowers and lenders were stressed and due to which economy grew at the low growth rate.

(Images merely for information purpose.)

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