Raghuram Rajan was RBI governor for three years till September 2016. (File)

Highlights Raghuram Rajan submits note to parliamentary panel on bad loans

Blames overoptimistic bankers, government "foot-dragging", slow growth

Says both UPA and NDA government were too slow to react

Former RBI governor Raghuram Rajan has said in his report to a parliamentary panel that he sent a list of high profile fraud cases to the Prime Minister's Office but was "not aware of any progress" on it.

In his report to the panel headed by BJP leader Murli Manohar Joshi, Raghuram Rajan says overoptimistic bankers, government foot-dragging and slow growth were factors in mounting bad loans. He also said the size of frauds in the public sector banking system had been increasing, though was still small compared to the overall volume of NPAs or Non-Performing Assets.

"The RBI set up a fraud monitoring cell when I was Governor to coordinate the early reporting of fraud cases to the investigative agencies. I also sent a list of high profile cases to the PMO urging that we coordinate action to bring in at least one or two to book. I am not aware of progress on this front. This is a matter that should be addressed with urgency," said Mr Rajan in his report.

Unfortunately, he said, the system had been "singularly ineffective" in bringing even a single high profile fraudster to book. "As a result, fraud is not discouraged," Mr Rajan said.

Though he does not specify the year, the Congress seized on the point and alleged that the former Reserve Bank of India governor had indicted Prime Minister Narendra Modi and his office. "Why didn't the PM take action against these known defaulters? When we demitted office the NPA was 2.83 lakh crore. How much is bad loans today- it's Rs 12 lakh crore," said Congress leader Randeep Surjewala.

Former RBI Governor Raghuram Rajan in 2016 sent a list of runaway defaulters to the PMO, yet the PM Modi took no action: @rssurjewala Incharge Communications AICC pic.twitter.com/RcqE3KsV78 - Congress (@INCIndia) September 11, 2018

Union Minister Smriti Irani of the BJP, however, called the report a "loud proclamation" of corruption on Congress watch. "Raghuram Rajan had said between 2006 and 2011, the UPA functioning led to increase in NPA (Non-Performing Assets) in banking structure," she said.

"The UPA Chairperson Sonia Gandhi led a government that attacked the very core of the Indian banking system," alleged Smriti Irani.

A larger number of bad loans originated in the period 2006-2008, said Mr Rajan's report, when economic growth was strong and previous infrastructure projects such as power plants had been completed on time and within budget.

"It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So, they are willing to accept higher leverage in projects, and less promoter equity. Indeed, sometimes banks signed up to lend based on project reports by the promoter's investment bank, without doing their own due diligence," he said.

This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle, said Mr Rajan, who was RBI governor for three years till September 2016.

His report also said: "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".

Project cost overruns escalated for stalled projects and they became increasingly unable to service debt, he said. "The continuing travails of the stranded power plants, even though India is short of power, suggests government decision-making has not picked up sufficient pace to date," he assessed.

On malfeasance and corruption in the NPA problem, he said, "Undoubtedly, there was some, but it is hard to tell banker exuberance, incompetence, and corruption apart".

"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 SBI Caps and IDBI to do the necessary due diligence," the note said.

He also tackled criticism of his policy to identify NPAs, saying the claim was "ludicrous" and made by people who have not done their homework.

Stating that "hindsight is 20/20", Mr Rajan said the RBI "should probably have raised more flags about the quality of lending in the early days of banking exuberance."

He added: "The RBI could have been more decisive in enforcing penalties on non-compliant banks. Fortunately, this culture of leniency has been changing in recent years."

Mr Rajan was invited to brief the parliamentary committee after former Chief Economic Advisor Arvind Subramanian praised him before the group, headed by veteran BJP leader Murli Manohar Joshi, for identifying the NPA crisis and trying to resolve it.

The report also suggests, as prevention: "Improve governance of public sector banks and distance them from the government".