Raghuram Rajan’s Remark on Modi Government’s NPA Management: A Shift in Perspective

Paromita Das

GG News Bureau
New Delhi, 28^th Dec. A Reversal of Opinions: Raghuram Rajan, the former Governor of the Reserve Bank of India (RBI), has been a vocal critic of the Modi government during his tenure at the central bank. His frequent disagreements with the government, particularly over monetary policies and handling of the economy, earned him the tag of being a “darling of the opposition.” However, in a surprising turn of events, Rajan recently lauded the Modi administration for its effective management of Non-Performing Assets (NPAs), a key challenge for the Bharatiya banking system. This unexpected praise comes after years of sharp criticisms and is worthy of scrutiny, considering Rajan’s pivotal role in the banking reforms during his tenure at RBI.

Understanding the NPA Crisis: The Historical Context: To comprehend the significance of Rajan’s recent remarks, it is essential to revisit the context of Bharat’s NPA crisis. NPAs are loans that have gone unpaid for an extended period, and their rise in the Bharatiya banking system has been a long-standing issue, primarily beginning after the global financial crisis of 2008. Rajan noted that projects funded by banks before the crisis started facing significant setbacks post-2008 due to factors such as corruption, delays in permits, and mismanagement. These factors caused a steep rise in NPAs, especially in public sector banks.

Rajan’s 2015 Asset Quality Review (AQR) was a watershed moment in addressing this crisis. The AQR helped to clean up the balance sheets of banks by ensuring that bad loans were promptly identified, with the necessary provisioning made. According to Rajan, this was crucial for alleviating the growing financial insecurity surrounding public sector banks. He recalled how he took his proposal for an AQR and the end of the moratorium on bad loans to Arun Jaitley, the then Finance Minister, who approved it without hesitation. This marked a turning point in the fight against NPAs.

The Modi Government’s Response, A Shift in NPA Management: Rajan’s praise for the Modi government’s handling of NPAs aligns with recent updates from Finance Minister Nirmala Sitharaman. According to her, between 2014 and 2023, the government’s initiatives helped recover more than ₹10 lakh crores from bad loans. The gross NPA ratio fell to a 12-year low of 2.8 percent by the end of the fiscal year 2024. These figures are a direct reflection of the government’s ongoing efforts to manage bad loans and prevent further escalation of the NPA crisis.

Rajan acknowledges that the implementation of AQR was a pivotal step. However, the Modi government’s broader policy initiatives played a crucial role in reducing NPAs over time. One of the most significant steps was the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. This law gave authorities the power to take control of defaulting companies from their promoters, thereby protecting the interests of creditors. Additionally, wilful defaulters were barred from participating in the resolution process, ensuring that there would be greater accountability.

Additional Measures to Tackle NPAs: Alongside the IBC, the government took several other steps to address the NPA issue. One such measure was the amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act) of 2002, allowing banks to auction the assets of defaulters. This was complemented by the establishment of the National Asset Reconstruction Company Limited (NARCL) to resolve stressed assets over ₹500 crore. The government also provided a ₹30,600 crore guarantee to back NARCL’s receipts, further enhancing the efficiency of the recovery process.

Public sector banks were also restructured through the establishment of Stressed Asset Management Verticals, such as the one in the State Bank of India (SBI), to manage and recover loans more effectively. These verticals allowed banks to monitor loans more closely, ensuring that any potential defaults were caught early. Moreover, the RBI implemented a system of Early Warning Signals (EWS) to trigger timely remedial actions for loans at risk of default.

A Positive Outlook: Rajan’s Acknowledgment: Raghuram Rajan’s acknowledgment of the Modi government’s success in reducing NPAs is notable, especially considering his earlier critiques. He conceded that the government’s approach, including the AQR, the IBC, and other reforms, helped set the stage for the reduction in bad loans. As he put it, “Eventually the situation is back on track,” signifying a recovery after years of financial distress. Rajan’s perspective carries weight given his experience and expertise in managing the Bharatiya economy, and his remarks add credibility to the government’s claims of progress.

Conclusion: The Long Road Ahead: While the reduction in NPAs under the Modi government is a significant achievement, experts agree that the work is far from over. The underlying issues that contribute to the creation of bad loans—such as poor project planning, delays in clearances, and systemic corruption—continue to be challenges for Bharat’s banking sector. Therefore, while Rajan’s praise is deserved, it also highlights the complexity of tackling NPAs and the need for continued vigilance.

The government’s strategy of combining regulatory reforms, legal frameworks, and institutional restructuring has certainly yielded results. Yet, with Bharat’s banking sector still grappling with certain vulnerabilities, it is essential to keep refining these measures. Raghuram Rajan’s shift in stance reflects a recognition of these efforts, providing a balanced view of the Modi government’s handling of one of the most significant financial challenges in Bharat’s economic history.