Rajan attacks vested interests but questions need to be asked about his acts of omission

Former Reserve Bank of India (RBI) governor Raghuram Rajan’s explosive note on non-performing assets in the banking sector will have reverberations all over and across all political barriers. The 17-page note on stressed assets in Indian banks given to Parliament’s estimates committee chairman Murli Manohar Joshi has begun to stir the hornet’s nest with charges and counter-charges of political malfeasance and corruption flying thick and fast. Key figures in the previous Congress-led regime will need to explain the sweet heart deals during the United Progressive Alliance (UPA) rule of prime minister Manmohan Singh. Going by the note, rampant corruption within and outside the banking system severely undermined public sector banks.

There is no reason to doubt the searing analysis provided by Rajan, who performed creditably as the chief economic advisor and RBI governor during the UPA rule and in the initial years of the National Democratic Alliance (NDA) government led by prime minister Narendra Modi. To him goes the credit for pushing banks to declare their non-performing assets – he even gave them a timeline to do so.

While genuine business failures are likely to happen, corruption and political nepotism in the banking system puts the Congress-led UPA in the dock. However, red flags have also been raised on the Mudra (micro units development and refinance agency) loans programme designed for small and medium enterprises and schemes like Udaan (Ude desh ka aam naagarik). If loans to micro, small and medium companies turn stressed as forewarned by Rajan, the NDA government’s intent to use banking as an instrument of evolving inclusive society may not trigger the desired change.

Meanwhile, Rajan’s note does not put equal responsibility on chairmen and managing directors of banks that actively connived in large corrupt deals when the UPA was in power. In fact, one wonders why Rajan as chief economic advisor and later as the central bank governor did not urge action against the ‘high, mighty and connected’ bankers, heads of companies and bureaucrats responsible for leaving banks stressed with bad loans. When it was known that the exuberance of bankers hit the very core of the banking sector, Rajan as RBI governor could have moderated their mood to prevent the virtual collapse of corporate lending in some of the big banks.

Rajan’s note might have provided enough fodder for dramatis personae on either side of the political divide to train their guns on rivals. In a noisy democracy like India, banks, companies, government and regulators will have to live with the slow delivery of justice or adjudication of serious corporate frauds.

Finding a way out through this mess is the challenge. Rajan’s note, while indicting both the UPA and the NDA for not acting with alacrity to clear the mess and bring the guilty to book also hints at what might be the way ahead by identifying the pitfalls.