Other than it being a way to defend prime minister Narendra Modi’s demonetisation, it is difficult to understand why NITI Aayog’s vice-chairman Rajiv Kumar blamed the GDP slowdown on then RBI Governor Raghuram Rajan’s decision to, through his Asset Quality Review (AQR), force banks to recognise dud loans. While Kumar had ripped into Rajan even when he took over the NITI job—he had, at that time, described Rajan as yet another Indian-born foreign economist who did not understand India’s ground realities—it is a lot worse this time around. Rajan’s policies, Kumar said, led to a ballooning of NPAs and, with banks needing to provision for this, they were unable to lend as much as in the past—“never had we”, Kumar said, “seen such a continuous and persistent year upon year deleveraging of credit”.
Indeed, the current policy of giving banks a fixed time to resolve NPAs before heading to the insolvency courts is the logical follow up of Rajan’s policy—this policy was recently criticised by the government since several power plants will now head for insolvency with RBI refusing to give banks more time to resolve the NPAs. What neither Kumar nor BJP leaders realise is that the pre-Rajan practice of giving banks endless time to restructure loans—presumably, the time would also allow the government to fix various bottlenecks like shortage of coal/gas supplies—never worked, and all that happened was that loans got rolled over and the mess worsened. And, to the extent the AQR increased NPAs, the BJP’s refusal to give banks a hefty recapitalisation is what slowed the lending; had banks been adequately capitalised early on—with an accompanying reforms package—they would not have been short of funds to lend.
But even before Rajan’s AQR, Kumar doesn’t appreciate, India Inc’s top firms were badly leveraged and were in no position to take on new projects anyway. Credit Suisse’s first House of Debt report that highlighted just how leveraged many of India’s top corporates were—especially the ones like GMR, GVK and Lanco that were big infrastructure investors—was published in 2012; four of the 10 firms, Credit Suisse pointed out, had an interest cover of less than one, making it clear they were on the brink of default. So, even if the banks weren’t reporting high NPAs and were able to lend more, India Inc wasn’t in any position to raise equity funds anyway; nor does Kumar dwell on the toll the UPA’s “policy paralysis” had taken in terms of big projects being stuck due to lack of clearances. In such a situation, had Rajan not forced banks to come clean, more loans would have been given to stressed projects and to many promoters who were also siphoning off the loans. And since a very large part of what House of Debt described as severely stressed debt turned into NPAs later, it is obvious the NPAs were going to climb. Rajan’s AQR just brought the muck out into the open faster.
Ironically, it was the NPAs coming out in the open that allowed the BJP to come up with its charge of the UPA’s “phone banking” that allowed cronies to get fresh loans; and it was then that the BJP came up with its NCLT-based insolvency laws. By dismissing Rajan’s AQR as something that hit India’s growth prospects, the NITI vice-chairman is actually dismissing perhaps the biggest reform by the government and, incidentally, one that is popular with the electorate since corrupt businessmen are now facing the prospect of losing their businesses.