Raghuram Rajan blames 'overall economic downturn' for bad loans

Asked to explain the 'real causes' of ballooning bad loans at public sector banks, RBI Governor Raghuram Rajan has put the blame on 'overall economic downturn'

PTI May 01, 2016 15:06:44 IST
Raghuram Rajan blames 'overall economic downturn' for bad loans

New Delhi: Asked to explain the "real causes" of ballooning bad loans at public sector banks, RBI Governor Raghuram Rajan has put the blame on "overall economic downturn", among other reasons, in his submission to the key Parliamentary Panel.

The Congress leader K V Thomas-led Public Accounts Committee (PAC), whose term ended on Saturday, has examined Rajan's response but can ask the RBI Governor to appear before it in future once it is reconstituted, sources said.

Various public sector banks may also be asked to appear before the panel again to explain their position.

The Parliamentary Panel had suo motu decided to examine the non-performing assets of the public sector banks, which touched Rs 3.61 lakh crore at the end of December 2015.

At the end of December, as many as 701 accounts with bad loans exceeding Rs 100 crore owed public sector banks (PSBs) Rs 1.63 lakh crore, while SBI accounted for the biggest chunk. PSBs had first refused to appear before PAC, but agreed later and made their submission.

During the examination of bad loan recovery process of the banks, the PAC found that in a number of cases the same bankers were trying to retrieve the bad loans who had earlier sanctioned the loans.

Raghuram Rajan blames overall economic downturn for bad loans

File photo of Raghuram Rajan. PTI

"Since the same officers, who sanctioned the loans are trying to retrieve it, it remains to be seen how successful they will be.. It seems they did not have a mechanism," a PAC member said on the condition of anonymity.

In its questionnaire for the RBI Governor, the panel observed that Private Sector Banks and Foreign Banks do not have as much NPAs as the Public Sector Banks. This was despite the constraints under which the entire banking sector operates being the same, except for the Priority Sector Lending (PSL) requirements.

Noting that Private Sector Banks and Foreign Banks have 2.2 per cent NPAs whereas the Public Sector Banks have 5.98 per cent NPAs, the PAC felt "it is hard to believe that the difference is only due to the PSL".

The PAC Chairman also sought to know the "real causes for the present spurt in NPAs and stressed assets" and whether these are really different from those listed by the Narsimham Committee that went into the NPA issue in 1998.

In his reply, Rajan said, "While some of the reasons for recent spurt in NPAs could be a subset of those indicated by Narasimham Committee, the level of stressed assets are seen in the context of overall economic downturn". Rajan listed six primary reasons for spurt in stressed assets that have been observed in recent times.

These included domestic and global economic slowdown, delays in statutory and other approvals especially for projects under implementation and aggressive lending practices during upturn as evidenced from high corporate leverage.

Other reasons cited by Rajan were laxity in credit risk appraisal and loan monitoring in banks and lack of appraising skills for projects that need specialised skills resulting in acceptance of inflated cost and aggressive projections. Besides, he also listed willful default, loan frauds and corruption in some cases among the key reasons.

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