Raghuram Rajan reminds India what caused bad loans, warns Mudra loans could be the next wave Of NPAs
- The government’s Credit Guarantee Scheme for MSMEs is “a growing contingent liability” that needs an urgent evaluation, he said.
- Both MUDRA loans as well as the Kisan Credit Card need to be examined closely for potential risk
- Over-optimism of 2006-2008 marked by risky bets combined with slow government decision making led to bad loan problem
“Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk,” Rajan said in his 17-page official response to India’s Parliamentary committee which had sought his views on the country’s rising bad loans menace.
He highlighted the government’s Credit Guarantee Scheme for MSMEs is “a growing contingent liability” that needs an urgent evaluation. This scheme, also called Udaan, was launched in 2000 has posted more than 2.5 million in cumulative guarantee approvals with loan amounts of over ₹1.2 trillion ($17 billion) in FY 2016-17.
Under the Mudra scheme, a total of ₹6.4 trillion ($85 billion) of loans is estimated to have been disbursed to date.
Over-optimism of boom years
Rajan noted that in the boom years of 2006-2008, a number of banks extended loans based on over-optimistic estimates that eventually soured due to a slowdown in the government’s decision making and slowing economic growth.
“Clearly, bankers were overconfident and probably did too little due-diligence for some of these loans. Many did no independent analysis, and placed excessive reliance on
In a moment of “irrational exuberance” similar to mistakes made in many economies in the phase of high economic growth, Indian banks took risky bets of high leverage with lower levels of promoters equity with little due diligence. Hit by economic slowdown and project cost overruns, infrastructure companies were unable to service their debt obligations.
Governance issues were also to blame. “A variety of governance problems such as the suspect allocation of coal mines coupled with the fear of investigation slowed down government decision making in Delhi, both in the UPA and the subsequent NDA governments,” he said.
RBI did not create NPAs
Taking on recent criticism from the Indian government that Rajan created the bad loans crisis resulting in an economic slowdown, he reminded the committee that bankers, promoters, or their backers in government sometimes turn around and accuse regulators of creating the bad loan problem when the regulator only acts as a “referee” and isn’t a player in the lending process.
“The truth is bankers, promoters, and circumstances create the bad loan problem. The regulator cannot substitute for the banker’s commercial decisions or micromanage them or even investigate them when they are being made,” he said.