Nirmala Sitharaman's criticism of Manmohan Singh, Raghuram Rajan: Finance minister is right in tracing roots of NPA mess to UPA era

Once again, the debate on who’s to be blamed for India’s big NPA mess is hogging the headlines. Union Finance Minister Nirmala Sitharaman recently blamed former Prime Minister Manmohan Singh and former RBI governor Raghuram Rajan for the present non-performing asset (NPA) mess. Public sector banks (PSBs) had the ‘worst phase’ under Singh and Rajan, she said, adding that the PSBs are still struggling to come out of that mire and are depending on government’s equity infusion to survive. Responding to Sitharaman’s statement, Congress spokesperson Sanjay Jha tweeted suggesting that it is incorrect to blame the United Progressive Alliance (UPA) for the mess.

NPA's of Banks under UPA inherited by NDA in 2014: Rs 2.6 Lakh crores

Under NDA NPA's ballooned to over Rs 11.5 Lakh crores by 2019.

But according to @nsitharaman UPA was worse off.

Someone please educate FM in elementary math; 11.5 > 2.6.

— Sanjay Jha (@JhaSanjay) October 16, 2019

Jha’s logic is wrong here and Sitharaman is right in tracing the roots of the NPA mess to the UPA era. The spike in the gross NPAs of the banks from around Rs 2.6 lakh crore in 2010-2013 period to about Rs 10 lakh crore was on account of the NPA clean-up exercise initiated by the Reserve Bank of India in 2014-15 with the early identification of stressed assets. Hidden NPAs were growing like cancer in the banking system and the banks were happily evergreening loans to shady companies to cover up their bad loans. Had the National Democratic Alliance (NDA) government not undertaken the clean-up process, the hidden bad loans would have blown at some point into a big crisis. [caption id=“attachment_6941571” align=“alignleft” width=“380”] File image of Finance Minister Nirmala Sitharaman. PTI[/caption] It was as a result of this exercise that the NPAs shot up to close to Rs 10 lakh crore. These bad loans were always there on the books of banks but weren’t reported. This happened as a result of the painful clean-up exercise and was finally reported by banks, mainly state-run lenders. Most of the loose lending and the infamous corporate-banker nexus thrived during the UPA years. The calls from North Block to state-run banks often influenced business decisions and bankers secretly complained of micromanagement by the government. During the UPA era, unrealistic business targets were set for government banks. It was a common sight those days to see PSBs flaunt their total business figures in the mastheads of newspapers. By any yardstick, the Congress-led government will have to own up the blame for the current state of the NPAs in the banking system. The banking system, with 70 percent of assets under government control, had to religiously follow the unofficially official diktats both during UPA I and II and give away the money. This led to the NPA crisis, all under the watch of the Congress-led government. The UPA could have corrected the problem, but no one acted because state-run banks were deemed to be piggy banks of politicians. Some bankers received kickbacks ranging from something as small as a watch or a gold ornament to a few who got promises of post-retirement berths. In fact, there was hardly any need of political nudging for public sector bankers to open their doors for unworthy borrowers; they were willing anyway. The high economic growth phase had made most bankers blind about hidden future risks. They merely looked at the past performance of the companies and extrapolated it to the future to decide on loans. Also, they expected the then near double-digit economic growth to continue forever creating enough cash flows for all firms to pay back loans. In many instances, most bankers only looked at the names and sanctioned loans—the Vijay Mallya case is one big example.

Raghuram Rajan is credited for initiating the clean-up in the banking system. But, Rajan will have to share the blame for acting too late and not alerting the government on time. Even before taking charge as the governor at the RBI, Rajan was the Chief Economic Advisor (CEA) to the government. As CEA, Rajan could have alerted the then government about the danger of loose lending and flouting the golden rules of the game.

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The RBI should have acted much earlier by cracking down on the NPA issue but Rajan’s action, arguably, was much delayed. Quite sometime later, Rajan told a Parliamentary panel that the UPA-era mistakes had created one of the biggest bad loan mess in the country, when, in Rajan’s own words, banks chased promoters “waving cheque books, asking him to name the amount he wanted”. But, the question arises, what did Rajan do in the capacity of the government’s economic advisor to sensitise it about the things that were going wrong when he was part of the government? The silence of CEAs on crucial issues when they are in office and the confessions that begin once they are out of government has proved to be of little help to the economy. During his governorship at RBI, through his statements, Rajan presented himself more as an outspoken politician in the garb of an economist/banker venturing into issues far beyond his mandate and triggering controversies with his political statements. But there was hardly any introspection as to why the RBI itself acted too late on the NPA issue. When it comes to the huge NPA crisis in the Indian banking system, Rajan’s caution came too late. For instance, though Rajan blamed public sector bankers for careless lending, he was largely silent on the micromanagement by the government during the UPA years in the operations of state-run banks that ultimately led to a collapse of functional autonomy of these institutions. Right now, India’s banking sector is in a deep mess. The public sector banks are at the mercy of government capital for their survival. The huge NPA build-up on account of careless lending during the boom years has taken a heavy toll on the banking system. Along with this, the crisis in the non-banking industry and small lending space (co-operative banks, microlending) are acting like a big drag on the financial system, taking the economic growth backward.