Raghuram Rajan cautions govt against loan waivers

Former Reserve Bank of India Governor Raghuram Rajan has cautioned the government against giving loans and loan waivers without “due diligence” as these may be preparing the environment for future non-performing assets (NPAs).

His comments, in the reply to the estimates committee of parliament, which had sought his views on the NPA crisis, come with a special reference to MUDRA loans given by the NDA government at the Centre and loan waivers initiated by Uttar Pradesh and followed by many other states.

He also warned against the Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI which, he said, was a growing contingent liability

“Government should focus on sources of the next crisis, not just the last one. In particular, the government should refrain from setting ambitious credit targets or waiving loans,” Rajan has said in his reply.

“Credit targets are sometimes achieved by abandoning appropriate due diligence,
creating the environment for future NPAs.,” Rajan said suggesting the Centre come out with an all-party agreement to this effect in the “nation’s interest”, especially given the impending elections.

“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 said.

Rajan said agriculture needed serious attention, but not through loan waivers.

“Loan waivers, as RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government. They are poorly targeted, and eventually reduce the flow of credit,” the former RBI Governor said.