Two third of my tenure was under BJP govt, Raghuram Rajan reminds FM, says bad loans need cleaning up

Former RBI Governor Raghuram Rajan hit out at Finance Minister Nirmala Sitharaman in response to her comments that he headed the “worst phase” of Indian Banks. Rajan said he was Governor of the Reserve Bank of India (RBI) from September 5, 2013, to September 2016; which is eight months in the Congress, but over 26 months under the BJP Government.

His response came when he was asked about finance minister Sitharaman's remarks in New York where she said that the Indian public sector banks had the "worst phase" under the tenure of former Prime Minister Manmohan Singh and Rajan as the RBI Governor. But he also added that he didn’t want to get into political arguments over the issue.

In an interview to CNBC, Rajan pointed out that while his term was going on, a crackdown on some bad loans in the banking sector that was clogged by these debts had begun but to this day, the job remains unfinished.

He said the country needs a whole armoury of reforms to usher in economic progress. At 5 per cent GDP growth rate, India saw a very bad economic slowdown, reported News18.

"Let me not get into a political back and forth. The reality is, there is a clean-up which we started, which is underway, which needs to be completed fast. The recapitalization has been done, but it also has to be done in the non-bank financial sector which is ceasing up and you need to clean-up, get the financial system going again if you want stronger growth," he added, reported News18.

"There are people who say why did we clean up, we could have gone on. We simply couldn't have gone on because banks were stopping lending because their balance sheets were getting clogged with non-performing loans. So, you had to force the recognization and recapitalization to set them back on track, which is half-finished right now".

"It has to be finished," he said. "Now, could it have been done faster, absolutely. We needed to do it faster but we are where we are. We need to clean up but also clean up new risks that have emerged for example in the non-bank financial system. If we don't do, the financial system is going to be an overhang over the economy."

On asked if the capital support that the GoI is using as a salvation extended to the banks, Rajan said that was required but the cleanup is most necessary.

"Because, without a clean-up, good money can go after bad. It is not only just clean up of legacy problems, it is also to make sure those don't happen again which is by improving governance. That is work in progress that has to be accelerated to ensure it won't happen again," he said.

On economic growth, Rajan said the country was witnessing a substantial slowdown, reported News18.

"The peak in 2016 was 9 per cent growth in one of the quarters, in the first quarter, now it is down to 5 (per cent). There are people who have raised a concern about whether 5 is really 5. The reality is there has been a substantial slowdown," he said. "I think 5 is bad enough. So, you have to do something about it because 5 doesn't get jobs given we are adding 1 million people to the workforce every month." "India needs far stronger growth but it is not going to come from tinkering. It really needs another generation of reforms. Good news, the government has political strength and the power to undertake those reforms. Bad news, [it] hasn't done so so far," he said.