The economy was strong between 2006-08. Bankers got over-optimistic and stopped doing their due diligence -- and this laid the foundation of the crisis. This is true for both Lehman bankruptcy and the US financial crisis, and the mounting NPA mess in India.
The economy was strong between 2006-08. Bankers got over-optimistic and stopped doing their due diligence — and this laid the foundation of the crisis. This is true for both Lehman bankruptcy and the US financial crisis, and the mounting NPA mess in India.
Raghuram Rajan, who was first to identify the banking crisis in India, recently said in a note to the Parliamentary Estimates Committee on Bank NPAs that one of the many factors behind bad loans crisis was over-optimism of the bankers.
“A larger number of bad loans were originated in the period 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget,” he said, adding: It is at such times that banks make mistakes.
The former RBI governor pointed out that bankers during the time of strong economic growth between 2006-2008 extrapolated past growth and performance to the future and took high leverage in projects.
“Unfortunately, growth does not always take place as expected. The years of strong global growth before the global financial crisis were followed by a slowdown, which extended even to India, showing how much more integrated we had become with the world. Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down,” he wrote in the note to the committee.
While the beginning of the NPA crisis finds a link in the 2008 financial crisis, there were a few other reasons too that led to the massive bad loans problem. Raghuram Rajan also said that, in some cases, government decisions — or lack of it — also resulted in some failure of projects.