Former Reserve Bank of India Governor Raghuram Rajan has listed “irrational exuberance” by banks between 2006 and 2008 as one of the reasons behind the bad loans crisis. He also blamed a slowdown in economic growth and slow decision-making by successive governments for the problem.
Rajan listed the reasons in a note to the Parliament Estimates Committee last week. The committee is headed by Bharatiya Janata Party MP Murli Manohar Joshi.
Many of the bad loans originated in 2006-’08, when economic growth was strong and previous infrastructure projects had been completed on time and within budget, Rajan said. “It is at such times that banks make mistakes,” he said. “They extrapolate past growth and performance to the future [prompting them to lend more]...This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle.”
However, growth does not always take place as expected, Rajan said. “The years of strong global growth before the global financial crisis were followed by a slowdown, which extended even to India,” he said. This rendered the previous projections unrealistic, Rajan said.
He said further: “A variety of governance problems such as the suspect allocation of coal mines coupled with the fear of investigation slowed down government decision-making in Delhi, both in the UPA [Congress-led United Progressive Alliance] and the subsequent NDA [National Democratic Alliance] governments,” Rajan said. Stalled projects became increasingly unable to repay debts, and current trends show the decision-making has still not picked up sufficiently, he said.
Rajan said malfeasance and corruption could also be behind the bad loans mess, but “it is hard to tell banker exuberance, incompetence, and corruption apart”. “Clearly, bankers were overconfident and probably did too little due diligence for some of these loans,” he added.