Ex-finance minister Arun Jaitley had given go-ahead to clean up bad loans, says Raghuram Rajan

MUMBAI: Former finance minister Arun Jaitley had encouraged Raghuram Rajan to take decisive action on cleaning up bad loans of Indian banks, the former RBI governor said in a recent interview to a news portal and asserted that the build-up of non-performing assets (NPAs) in the banking sector, worsened by corruption, delayed clearances, and the global financial crisis, had necessitated a comprehensive review.

"When I discussed the need to clean up the system with Jaitley, he said, 'fine, go ahead'... We did it," Rajan told a digital news platform. However, he highlighted the slow pace of recapitalisation by govt, which hindered resumption of lending by banks. Rajan was RBI governor from 2013 to 2016.

"We had problems in India over and above the global financial crisis which was that there were corruption scandals and therefore permissions started getting delayed a lot, projects weren't getting land, projects weren't getting environment permissions... they were building NPAs in the financial system," Rajan said. In a 2014 interview with TOI, Rajan had spoken of the need for "forensic skills" in RBI supervision to identify "where the bodies are buried" in banks. The RBI initiated an asset quality review (AQR) in 2015, which exposed significant bad loans that had been carried as performing assets. Rajan said, "Many loans became NPAs after the crisis and delays in projects. During my predecessor's time, a moratorium was allowed on terming them non-performing, but it only prolonged the problem."

While the system eventually stabilised, he emphasised the importance of avoiding a repeat of past mistakes, particularly in retail and MSME loans. The AQR turned out to be the biggest clean-up in Indian banking history with lenders posting losses worth crores and facing lending curbs.

In a recent war of words with Congress's Rahul Gandhi, FM Nirmala said it was during the UPA govt that bank employees were harassed and forced to give loans to cronies through "phone banking" by the then govt functionaries.