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Raghuram Rajan blames scams and ‘policy paralysis’ under UPA government for NPA mess

In response to a letter that sought his inputs over the issue of the accumulated Non-Performing-Assets (NPAs) of Indian banks, former RBI governor Raghuram Rajan has written a letter to the head of the Lok Sabha panel set to look into the matter. According to reports, in his letter addressed to MP Murli Manohar Joshi, the former RBI governor has written that the problem of accumulating NPAs has begun from around 2006 and has blamed UPA era scams, policy paralysis among other things.

Rajan has reportedly written that banks had also failed to enforce due diligence and they also have failed to act swiftly on bad loans. On this, he adds that he cannot say whether the slow response and lack of due diligence were due to corruption or sheer incompetence. He also mentions that the unrealistic growth projections set up by the banks started acting against them in the post-2008-slowdown period.

Rajan also reportedly emphasized that the scam-ridden UPA government was slow in decision makings and it had created a policy paralysis for the banking sector which had delayed several ongoing projects.

Rajan has reportedly further stated that as laws did not allow banks to seize properties and banks chose evergreen loans. He has also added that banks also extended further loans in order to prevent ‘zombie’ loans from turning into non-performing assets. He has mentioned that the exuberance, incompetence and the corruption of bankers, along with a lack of monitoring of companies with a history of default has led to high NPAs over the years.

NITI Ayog chairman Rajiv Kumar had recently stated that the faulty methods of identifying and demarcating NPAs implemented during Rajan’s time had led to NPAs ballooning from 4 lakh crores to 10 lakh crores, thus causing the banks to pull back their extended credits thereby resulting in companies becoming starved of their working capital, which had caused a slowdown in India’s economy. responding to Kumar’s allegation, Rajan has reportedly stated that the RBI did introduce correction measures, but as the RBI is not a commercial banker and only a governing body, banks dithered despite being aware of the crisis. He has also added that the RBI representatives in banks’ boards were not very effective.

Raghuram Rajan was the chief economic advisor to the UPA government before becoming the RBI governor. His tenure came under scrutiny after it was revealed that the 13,000 crore PNB scam co-accused Mehul Choksi was one of the business owners in whose favour the infamous 20:80 gold import scheme was amended right before the UPA government lost power.

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