Raghuram Rajan predicts sources of next banking crisis: Mudra scheme, loan waivers – here’s what he says

By: | Updated: September 11, 2018 2:49 PM

Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk, said Raghuram Rajan.

Raghuram Rajan has explicitly warned against ambitious credit targets and loan waivers, saying that they could be the sources of next banking crisis.Raghuram Rajan has explicitly warned against ambitious credit targets and loan waivers, saying that they could be the sources of next banking crisis. (Image: IE)

Raghuram Rajan has explicitly warned against ambitious credit targets and loan waivers, saying that they could be the sources of next banking crisis. In a note to the Parliamentary Estimates Committee on bank NPAs, former Reserve Bank of India (RBI) governor Raghuram Rajan said that the government “should focus on sources of the next crisis, not just the last one”.

Raghuram Rajan urged the government to refrain from setting ambitious credit targets or waiving loans. “Credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs. Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk.”

“The Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency,” he added.

Recently, it was reported that Hansraj Ahir, Minister of State for Home Affairs, on June 6 recommended stopping salary increments of branch managers who fail to meet the MUDRA loan target. Micro Units Development and Refinance Agency Bank (MUDRA) was launched in 2015 to provide unsecured loans up to Rs 10 lakh to small enterprises with the aim to boost self-employment. In the Budget 2018, Finance Minister Arun Jaitley allocated Rs 3 lakh crore for the Mudra scheme.

Like his successor and present RBI governor Urjit Patel, Raghuram Rajan also argued that loan waivers vitiate the credit culture. “Agriculture needs serious attention, but not through loan waivers. An all-party agreement to this effect would be in the nation’s interest, especially given the impending elections,” he suggested in the note.

On the issue loan waiver, the central government has shown restraint but many state governments have announced it over a period of time. In FY18, farm loan waivers touched 0.32% of the GDP as against budget estimates of 0.27%, the RBI said in a report in July.

Raghuram Rajan, who identified the problem of high non-performing assets (NPAs) in the banking system and initiated the clean-up process in 2015, was asked by the Parliamentary Committee to brief on the issue. The former governor noted that the problem of mounting NPAs happened mainly due lack of due diligence by the banks while granting loans between 2006-08.

He said that banks in their over-optimism sometimes signed up to lend based on project reports by the promoter’s investment bank, without doing their own due diligence. “One promoter told me about how he was pursued then by banks waving checkbooks, asking him to name the amount he wanted,” Raghuram Rajan told the committee.

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