Amid growing rift between the RBI and the Modi Government, Finance Minister Arun Jaitley on Tuesday flayed the Central bank’s indiscriminate lending between 2008 and 2014 that, he said, led to the present bad loan or NPA crisis in the banking industry.
The remarks by Jaitley came days after RBI Deputy Governor Viral V Acharya warned that undermining autonomy and independence of RBI could be “potentially catastrophic”. Backing Acharya, the RBI employees association on Monday said “undermining the Central bank is a recipe for disaster” and the Government must stop nibbling at its autonomy.
“You see (between) 2008 and 2014, after the global economic crisis, to keep the economy artificially going, banks were told to open your doors and lend indiscriminately,” Jaitley said at India Leadership Summit organised by the US-India Strategic Partnership Forum.
“The Central bank looked the other way, there was indiscriminate lending,” he said. “I am surprised that at that time the Government looked the other way, the banks looked the other way. I don’t know what the Central bank was doing (because) it was the regulator of these. They kept pushing the truth under the carpet.”
The RBI and Government have been at loggerheads on several issues, including the Nirvav Modi scam, a flash point that has now turned into a full blown conflict.
Jaitley had blamed the RBI, the supervisory agency for the way Nirav Modi defrauded the PNB. The RBI had, on the other hand, pointed out that the Government controlled the PNB, its management and the bank’s board.
The Government was also not happy with the ‘prompt corrective action’ (PCA) framework, under which the RBI prevents weaker backs from lending and expansion. Tightening of monetary policy and NPA resolution frameworks were also other areas of differences between the RBI and the Centre.
Jaitley said the previous UPA Government was pushing banks to lend which resulted in credit growth in a year shooting up to 31 per cent from the normal average of 14 per cent. He went on to add that banks went into projects of demerit which did not have the capacity to sustain the capital.
“Total bank credit in India from Rs 18 lakh crore in 2008, by 2014 went up to Rs 55 lakh crore. And this is something the banks couldn’t sustain, the borrowers couldn’t sustain and you had the NPA problem,” he said.
The non-performing assets or NPAs were put at Rs 2.5 lakh crore during those times but when an asset quality review was ordered by the new Government in 2014, it was discovered that bad loans were of the order of Rs 8.5 lakh crore, he said.
Delivering the AD Shroff Memorial Lecture in Mumbai on Friday, Acharya called for greater powers for the RBI to regulate public sector banks as it seeks to clean up the banking system. This independence, he said, was necessary to secure greater financial and macroeconomic stability. Neither the Finance Ministry nor Jaitley has so far responded officially to the comments.
Jaitley, who had previously stated that politicians have to unfairly take the blame for any wrongdoing while supervisors get away relatively easy, did not refer to Acharya’s speech or the reported tension between his Ministry and RBI during his comments at the event on Tuesday.
In his speech on Tuesday, Jaitley said reforms undertaken by the Government have led to significant improvement in revenues. “My own estimation is that from 2014 to 2019, we will be almost very close to doubling our tax base,” he said.
This has been possible because of formalisation of the economy that demonetisation brought about, the new indirect tax structure (GST) and improvement in indirect tax structure without raising rates.
“This gave us the flexibility to take a departure from the past where there were only slogans,” he said. “Demonetisation (was a) difficult step but helped us to make it clear that formalisation of the economy is our clear intent.” India, he said, had 3.8 crore income tax filers when the BJP Government took office in 2014.
“In four years, it has already moved up to about 6.8 crore. This year, I am sure it will be very close to 7.5-7.6 crore which is almost double,” he said adding the first year of Goods and Services Tax (GST) implementation has raised the indirect tax assessee by 74 per cent.
Recounting achievements of the Government, Jaitley said all villages are close to being connected by roads, the target of houses for all is likely to be achieved by 2022 and all households will have electricity by year-end.
