The handing out of bad loans was part of the historic phenomenon of irrational exuberance that is common across countries at such a phase in the cycle, former RBI Governor Raghuram Rajan said (Reuters file photo)

Raghuram Rajan says an executive once told him he was " pursued" by banks, who waved chequebooks and asked him to "name the amount" he wanted in loans.

This revelation was part of the former Reserve Bank of India governor's written response to a parliamentary panel, one full of stark, biting comments on Indian banks' non-performing assets (NPAs).

Rajan said "...a larger number of [the] bad loans originated in the period [of] 2006-2008." That will likely be used as ammunition by the ruling Bharatiya Janata Party to target the opposition Congress.

The Narendra Modi-led BJP government has long claimed that its Manmohan Singh-led Congress predecessor was largely to blame for Indian banks' NPA crisis.

The parliamentary panel Rajan wrote to had sought his advice and "expert view" on the NPA crisis. According to estimates, Indian banks are currently burdened with bad loans that amount to more than Rs 10 lakh crore.

One promoter told me about how he was pursued then by banks waving chequebooks, asking him to name the amount he wanted - Raghuram Rajan

Rajan, who completed his term as RBI governor in September 2016, laid the blame for this mega NPA crisis on banks, labelling the handing out of loans as a "historic phenomenon of irrational exuberance".

Indian banks, however, weren't outliers when it came to this irrational exuberance, Rajan clarified. The phenomenon is "common across countries at such a phase in the cycle," Rajan said.

'BANKS FAILED IN MONITORING'

Rajan said "...too many loans were made [given] to well-connected promoters who have a history of defaulting on their loans [sic]."

Rajan particularly faulted public sector banks, saying, "Public sector bankers continued financing promoters even while private sector banks were getting out [of financing the said promoters]."

Rajan also blamed public sector banks for inadequate due diligence before and after handing out loans.

[Bad loans were part of the] historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle - Raghuram Rajan

"Public sector bank monitoring of promoter and project health [for which loans were sought] was inadequate...Banker performance after the initial loans were made [was] also not up to the mark [sic]," Rajan said.

"Unscrupulous promoters who inflated the cost of capital equipment through over-invoicing were rarely checked," Rajan also said.

Another reason behind the Indian banks' bad loans problem, Rajan said, is that bankers fear they will be "subject to harassment by the investigative agencies" if they label a transaction as fraud.

ON RBI ROLE

In his reply on the NPA crisis, Rajan also spoke about the Reserve Bank of India's role, admitting that the central bank could have done more and that a "culture of leniency" present at the bank has started changing.

Rajan admitted that the RBI could "probably have raised more flags about the quality of lending in the early days of banking exuberance".

Rajan said that the RBI could have started the asset quality review (AQR) process earlier than it did and that it could have been "more decisive in enforcing penalties on non-compliant banks".

This, however, is changing, Rajan said. "This culture of leniency [at the RBI] has been changing in recent years."

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