Dr. Raghuram Rajan’s note to the Parliamentary Estimates Committee on Banks NPAs is a must read for every person who wants to understand the working of the Indian banking system in the larger macroeconomic and political context. He highlights over-optimism among bankers, slow growth, government paralysis, malfeasance, fraud and loss of interest among bankers & promoters as some of the reasons contributing to the NPA crisis. He traces the problems that mar our banks and how government as well as markets have contributed to its plight.
In this note without much jargon that overrun academic papers, he has elucidated the present banking crisis in understandable terms which any college freshie can grasp. This is quite important from an educational perspective because much of the debate on bank NPAs in media has been focused on the party politics between Congress and BJP. This note takes us out of that illusion and brings both political parties into the sphere of blame. It is a note as much to the people of India, for us to understand what is going on, as it is to the Parliament that requested it.
The note is unique, also, in that it does away with the orthodoxy of free markets and libertarianism. There is no drumming for deregulation but an earnest attempt to balance government role so that markets function properly. It tries to address the issues of designing regulations, monitoring progress and evaluating policies. While discussing the steps taken by RBI and government to tackle bad loans and improve banking, Dr. Rajan describes the dynamics of policy implementation as it affects different sectors differently, the unforeseen problems that emerge that need coordinated action and the mismatch of incentives in the system that produces poor results.
I also find that the note tacitly acknowledges the role of ‘political economy’ in the banking sector and does not confine itself to the paradigm of ‘economics’ that has found itself quite wanting in recent decades. After all, who would think that a rational individual, ‘homo economicus’, like a banker would have to be constantly cajoled into doing what is ‘rational’? Only when we remove the facade of rationality do we see the political and systemic dynamics that mire the incentives of decision making in our banking system.
Some commentary on the Indian economy recently has been about the falling Rupee. At the same time, the growth in the last quarter was better than the last few ones. There is the constant reports of lakhs of crores of NPAs in Indian banks. Our leaders keep talking of strong macroeconomic fundamentals. And don’t forget the ‘Ease of Doing Business’ index. Oh…and did I mention demonetization? The Indian economy grew by 8+% during 2006-08. If Dr. Rajan is to be believed, this was the period when the bad loans originated. So, how good was that growth? Does this give you any real picture of the Indian economy or its trajectory?
I don’t think so. The fetish with economic growth has so single-mindedly seduced our imagination that the nuances and layers underneath remain papered over until crisis hits. Even then, we are left with a worthless partition drama on nightly news and newspapers where wild pronouncements by politicians get maximum coverage. Some even blame the RBI for creating bad loans. These experts, who so doggedly supported demonetization in the name of deep surgery, do not want any of that stuff for the banks. They do not even want the problem diagnosed, let alone treated.
Reading the note, I could not help but see the futility of the growth narrative that has enraptured our discourse. Just as stock prices do not reflect the real economy, even growth figures can sometime whitewash the many fissures that underlie it. The problem is so bad that political myopia of government has turned into public myopia where we are also participants in this blame game between politicians while the banking system exacerbates.
If anything, this cautionary and sincere note by Dr. Rajan should take us out of the stupor, open our eyes and notice the realities.