New Delhi:

Corruption and delayed planning permits, or land and environmental clearances, contributed to the build-up of non-performing assets – post the global financial crisis – on Indian banks’ books, former Reserve Bank chief Raghuram Rajan said Wednesday in an interview with an online newspaper.

Mr Rajan, the RBI Governor from 2013 to 2016, said an AQR, or asset quality review, started in 2015 led to bad loans “tumbling out”, and prompted a talk with the late Arun Jaitley, then the Finance Minister; Mr Rajan told The Print Mr Jaitley gave him the greenlight to “clean up” the system.

“He said, ‘fine, go ahead’. We did it… but it required the government to put capital in there (and) I think we were not fast enough to put back the capital needed to resume lending…” he said.

“The issue was that post the global financial crisis many projects started in the euphoria before the crisis were in trouble. And, of course, we had problems in India over and above the global financial crisis, which was corruption scandals and, therefore, delayed permissions for projects…”

“… they were building NPAs in the financial system, which is typical after a period of exuberance, euphoria,” he said, recalling the story of the banker who went running after an entrepreneur with a blank cheque because projects had succeeded, handsomely, before the global financial crisis.

“So, once the crisis hit and projects were delayed (and many loans became NPAs). In my predecessor’s time a moratorium was allowed on terming them ‘non-performing’. And, eventually, what happened was banks sitting on chunks of bad loans were not recognising them,” he said.

In May, Finance Minister Nirmala Sitharaman underlined the size of that chunk; she said banks had recovered over Rs 10 lakh crores in bad loans between 2014 and 2023.

READ | Banks Recovered Over 10 Lakh Crore Bad Loans In 9 Years: Centre

In posts on X, Ms Sitharaman also slammed the Congress-led UPA government that she said “turned the banking sector into a cesspool of bad loans, vested interests, corruption, and mismanagement”.

The Banking sector is considered the backbone of a nation’s economy. Recently, India’s banking sector achieved a significant milestone by recording its highest-ever net profit, crossing ₹ 3 lakh crores.

This is in stark contrast to the situation before 2014 when @INCIndia-led…

— Nirmala Sitharaman (@nsitharaman) May 31, 2024

And, in line with that ongoing recovery bid, this week she said over Rs 15,000 crore in assets belonging to debts run up by fugitive businessmen like Vijay Mallya and Nirav Modi.

READ | 14,000 Crore Of Mallya’s Assets Restored To Banks: Centre

Mr Rajan said that when he was appointed RBI chief, he told the government, ‘Just extending it (the moratorium) is going to create more problems down the line. We need to clean up’. The subsequent AQR looked into the books of every bank to ensure each borrower was treated the same way.

“That itself was enough to reveal that a whole lot of loans were being carried on the book as ‘performing’. We allowed some leeway but a lot of bad loans came tumbling out,” he said.

For the AQR we needed two things, Mr Rajan said. From the RBI’s side to reconsider bad loans. And from the government’s side to recapitalise banks. “So, I went to Arun Jaitley and said, ‘Look, I am warning you these have to come out. Otherwise, they will keep they system from lending.”

“Eventually the system got back on track. The key today, of course, is to make sure it (the system) doesn’t make new mistakes,” he said, also flagging the possibility of a new bad loans crisis driven by unsecured retail loans and, possibly, also by defaulting from the MSME sector.

Former RBI governor Raghuram Rajan said regardless of whether one picks services, manufacturing, agricultural construction, India has a problem. File
| Photo Credit: PTI

India is not reaping the benefits of demographic dividends, former RBI governor Raghuram Rajan said on April 16, emphasising that there is a need to focus on improving the human capital and enhancing their skill sets.

“I think we are in the midst of it (demographic dividend), but the problem is we are not reaping the benefits,” Mr. Rajan said at a conference on “Making India an Advanced Economy by 2047: What Will it Take” at the George Washington University here.

“That’s why I said 6% growth. If you think that’s about what we are right now, take away the fluff in the GDP numbers. That 6% is in the midst of a demographic dividend. It is much below where China and Korea were when they reaped their demographic dividend. And that’s why I’m saying we are being overly complicit when we say this is great. This is not because we are losing the demographic dividend because we are not giving those guys jobs,” the former RBI governor said.

“And that leads us to the question, how do we create those jobs? The answer to my mind is partly enhancing the capabilities of the people we have, partly changing the nature of the jobs that are available and we need to work on both fronts.

“This idea of apprenticeship, which the Congress has in its manifesto is worth working on. I think there’s a lot that needs to be done to make it effective, but we need many more students to at least be capable of doing a good job,” Mr. Rajan said, adding that there also needs to be focus on job creation.

Mr. Rajan was critical of India spending billions of dollars on chip manufacturing. “Think about these chip factories. So many billions going to subsidise chip manufacturing,” he said, adding that a number of job intensive areas like leather are not doing good.

“We are going down in those areas. No wonder we have more of a job problem. The job problem was not created in the last 10 years. It’s been growing over the last few decades. But if you neglect the areas which are more intensive, I’m not saying we need to now offer subsidised subsidies to leather examples, but figure out what’s going wrong there and try and rectify that,” he said.

Responding to a question, Mr. Rajan said a lot of Indian innovators now are going to Singapore or to Silicon Valley to set up because they find access to the final markets much easier there. “We need to ask what is it that forces them to go outside of India to set up rather than stay inside India? But what is really heartwarming is talking to some of these entrepreneurs and seeing their desire to change the world and increasingly many of them are not happy staying in India,” he said.

“They want to actually expand more globally. I think there is a young India that has a Virat Kohli mentality. I’m second to none in the world,” Mr. Rajan said.

Earlier in his presentation, Mr. Rajan said regardless of whether one picks services, manufacturing, agricultural construction, India has a problem.

“And this is so well known, I don’t need to elaborate. Unemployment numbers are high, disguised unemployment is even higher, labour force participation is low, female labour force participation is really alarmingly low…the share of agriculture and jobs is increasing in recent times. Of course, all this is exhibited in highly educated unemployment and massive numbers of people applying for government jobs. PhDs applying for jobs as peons in railways,” he said.

“Even as this is happening. Even as we have a massive labour which is unemployed, we have the capital intensity of manufacturing steadily going up,” Mr. Rajan said.

Article corrected post publication.