FM Blames RBI For Allowing ‘Mindless Lending’ During UPA Tenure; Says NPA Crisis Is Due To Irrational Credit Growth

Finance Minister Arun Jaitley on Tuesday came down heavily on the Reserve Bank of India (RBI) for its failure to rein in indiscriminate lending during 2008 and 2014, that has led to the present bad loan or NPA crisis in the banking industry.
The remarks came amid reports of escalating institutional tensions between the Finance Ministry and the RBI over the autonomy of monetary policy makers.

“You see (between) 2008 and 2014, after the global economic crisis, to keep the economy artificially going, banks were told open your doors and lend indiscriminately,” Jaitley said at the India Leadership Summit organised by US-India Strategic Partnership Forum. “The central bank looked the other way, while there was indiscriminate lending,” he said.

He also said that a major chunk of lending during that period makes up for the NPAs. "The stressed assets and the NPAs had been unspecified for a long time. The NPAs was kept under the carpet. Capital Adequacy was eroded because of them," he added.

The government of the day, he said, had pushed 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.
Though he did not directly refer to it, Jaitley’s remarks can be viewed as a strong response to RBI Deputy Governor Viral V Acharya’s speech on Friday where the latter said that undermining the central bank’s independence could be “potentially catastrophic”. This was seen as a veiled reference to RBI pushing back hard against government pressure to relax its policies and reduce its powers.

In his speech, Deputy Governor Viral Acharya made a mention of at least a few major friction-points between the two to emphasise that the RBI was constrained by lack of autonomy in several areas. One of the issues he flagged was the proposal to create a separate payments regulator where the RBI will have only a limited say; the other is its limited powers to discipline and act against erring public sector banks; and the third is the constant government demand for more dividends.

(With inputs from PTI)