Former Reserve Bank of India (RBI) governor Raghuram Rajan’s written submission to the Parliament estimates committee on the issue of Non-Performing Assets (NPAs) in banks has triggered a war of words between the Congress and the Bharatiya Janata Party (BJP), with each blaming the other for the crisis which threatens to hobble Indian banks and hurt the world’s sixth-largest economy. In the main, the BJP trained its guns on the Congress on the basis of Rajan’s statement that most bad loans originated between 2006 and 2008; and the Congress on the BJP because Rajan said he set up a fraud monitoring cell and sent a list of high-risk offenders to the Prime Minister’s Office (PMO) but nothing much came of this. Rajan doesn’t mention when he sent the list to the PMO, although the fraud monitoring cell was set up in 2016.Read | Had submitted list of high profile fraud cases to PMO when I was RBI governor, says RajanUnion textile minister Smriti Irani said on Tuesday that Rajan’s statement clearly proves it is the Congress, and the United Progressive Alliance (UPA) government which it led between 2004 and 2014, that was responsible for increased NPAs. “UPA chairperson Sonia Gandhi led a government that attacked the very core of the Indian banking system. Raghuram Rajan has said that between 2006-08, the UPA functioning led to increased NPAs in the Indian banking structure,” she said. What Rajan has said, she added, is a reflection of not only the ‘mafia raj’ in policies during the UPA government, but also a challenge that the previous government left behind for the nation to deal with.The Congress’s chief spokesperson, Randeep Singh Surjewala, picked on the point about the fraud monitoring cell set up in 2016 and the list sent to the PMO. “But no action has been taken. He (Rajan) has indicted the Prime Minister and the PMO on the fraud being committed and on the escape of fraudsters,” he said. Surjewala claimed that the list included the names of jewellers Nirav Modi and Mehul Choksi, who are accused of defrauding Punjab National Bank (PNB) to the tune of ₹13,500 crore. “But no action was taken against any of the people in the list. This shows Prime Minister Modi’s complicity,” he alleged.The Congress leader said that when the UPA government demitted power in 2014, NPAs were to the tune of ₹2,83,000 crore. “This was very much in the controllable limit. Today, the NPAs under this (NDA) government have reached a staggering ₹12,00,000 crore. Who is responsible for the bad loan NPAs of today that amount to ₹9,17,000 crore? Naturally, the failure of ‘Modinomics’ has decimated the economy of India. You can hold Congress government accountable for ₹2,83,000 crore,” he said.A careful reading of Rajan’s submissions, which have been uploaded on his website, shows that both parties are cherry-picking parts of his statement to suit their purposes. It categorically says that to blame only corruption for the rise in NPAs will be inappropriate. “How important was malfeasance and corruption in the NPA problem? Undoubtedly, there was some, but it is hard to tell banker exuberance, incompetence, and corruption apart,” Rajan says. Read | ‘Over-optimistic bankers, slow decision-making’: Former RBI governor Rajan decodes bad loansWhile the statement notes that “a larger number of bad loans were originated in the period 2006-08”, it also adds that the roots of these lay in irrational exuberance which was driven by extrapolation of past growth and prospects of future performance. High economic growth rate and timely completion of large infrastructure projects led to a situation where banks were willing to lend even with low promoter equity and lack of due diligence. Once growth took a hit after the economic crisis and domestic demand slowed, these projections fell flat. It is this process which created large NPAs, Rajan says. The Indian economy grew by 9.5%, 9.6%, and 9.3% in 2005-06, 2006-07, and 2007-08. In the year of the crisis, 2008-09, it grew by 6.7% on the back of a fiscal stimulus programme.Interestingly, Rajan flags issues which suggest that not much has been done to unearth the corruption which might have played a role in the NPA crisis. He argues that instead of holding people responsible for specific loans, an attempt should be made to determine whether bankers, especially CEOs of banks that went from healthy to undercapitalised, had accumulated unaccounted wealth. His statement also mentions that under him RBI constituted a fraud monitoring cell, which prepared a list of offenders guilty of high-profile bank fraud, and sent this to the PMO requesting coordinated action to bring at least one or two to book. Saying he was unaware of any progress on this, Rajan has called for urgent action in this regard. While these parts of Rajan’s submissions will help the Congress in refuting the BJP’s corruption charge, he has clearly indicted the previous regime for failing to put in place institutions which could have led to a timely diagnosis and possible solution to the NPA crisis at an early stage. India’s banking laws gave very little power to the bankers to recover loans from large promoters and this inefficient system allowed promoters to game the system. “Not only could they play one lender off against another by threatening to divert payments to the favoured bank, they could also refuse to pay unless the lender brought in more money, especially if the lender feared the loan becoming an NPA,” Rajan says. The “ever-greening” problem where banks gave even more loans to borrowers who were sitting on NPAs worsened the bad loan crisis. “Until the Bankruptcy Code was enacted (by the NDA government), promoters never believed they were under serious threat of losing their firms,” Rajan says. He also reiterates his long-standing critique of the government not doing enough to rejuvenate governance and leadership in government-owned banks and end the culture of “politicisation” of board appointments. He criticises the limited entry of outside talent in government banks. Internal resistance towards such reforms has led to “lakhs of crores of national assets” being “held hostage to the career concerns of the few”, he says. While much of these are legacy issues, there has been little progress on this count under the present government. Rajan also takes on NITI Aayog deputy chairman Rajiv Kumar’s claim that RBI’s asset quality review in 2015 led to a slowdown in credit growth and hence economic growth. “Growth rate came down not because of demonetisation, but because there was a declining trend for the last six quarters. This growth was declining because of rising NPAs in the banking sector…Because under the previous governor Mr Rajan they had instituted new mechanism to identify stressed and non-performing assets, these continued to grow up, which is why banking sector stopped giving credit to the industry…This is the cause of slowdown in growth.” Kumar had said.Rajan gives data to show that industry credit from government banks had started declining even before asset quality review was started. “To do deep surgery such as restructuring or writing down loans, the bank has to recognise it has a problem – classify the asset as a Non-Performing Asset (NPA). Think therefore of the NPA classification as an anesthetic that allows the bank to perform extensive necessary surgery to set the project back on its feet. If the bank wants to pretend that everything is all right with the loan, it can only apply band aids – for any more drastic action would require NPA classification,” Rajan says. The key difference between the pre- and post-Rajan era is the absence of the insolvency and bankruptcy code (IBC) in the former, a senior economist with a leading private bank said on condition of anonymity. For lack of an IBC, Rajan could only address the first of four Rs – recognition,resolution, recapitalisation and reform – flagged by former chief economic advisor Arvind Subramanian while describing India’s bad loan crisis, he added. “With the IBC in place we are halfway in addressing the second R, but other two will probably have to wait till the (next general) elections are over,” he added. One part which both parties have decided to ignore is Rajan’s comments on the culture of farm loan waivers. “Loan waivers, as RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government. They are poorly targeted, and eventually reduce the flow of credit. Agriculture needs serious attention, but not through loan waivers,” Rajan says,calling for an all-party agreement to not give farm-loan waivers in “nation’s interest”.The BJP had promised a farm loan waiver before the Uttar Pradesh assembly elections last year and announced a ₹32,000 crore scheme to do so after winning the polls. Subsequently, the BJP government in Maharashtra and the Congress-Janata Dal (Secular) government in Karnataka have also announced farm loan waivers.