A Critical Look at Raghuram Rajan's Financial Leadership and Legacy
As we reflect on the tenure of Raghuram Rajan as RBI governor, the questions remain: why was he so silent on farmer loan waivers, why did he fail to address Non-Performing Asset (NPA) issues early in his term, and why did he not proactively implement financial reforms that could have strengthened the Indian banking system?
Why Silence on Farmer Loan Waivers?
One of the most pressing issues during Rajan's tenure at the RBI was the persistence of farmer loan defaults. While he had the platform and the necessary knowledge to speak out, he chose to remain silent on this matter. Had he taken a more proactive stance, farmer distress could have been mitigated much earlier, potentially averting further social and economic challenges.
Lack of Action on NPA Curb
At the start of his tenure as RBI governor, Rajan had the opportunity and expertise to take decisive action on Non-Performing Assets (NPAs), a critical issue for the Indian banking sector. Instead of addressing the root causes of NPAs, such as poor lending practices and inadequate risk management, he did not implement the necessary reforms. This inaction has left a lasting impact on the stability and robustness of the Indian banking system.
Unnecessary Complexity and Delay in Implementing Reforms
During his tenure, Rajan had the chance to push for the implementation of the Insolvency and Bankruptcy Code (IBC) much earlier, perhaps 20 years ago, or even during his time as Economic Adviser to the UPA government. The IBC could have provided valuable tools for the recovery of bad loans and enhanced the resilience of the financial sector. However, he missed the opportunity to implement these reforms, leaving the banking sector in its current fragile state.
Rajan also had the power to request a special forensic audit to uncover the truth about loan defaults, such as those involving Kingfisher, Nirav Modi, and Mehul Choksi. Instead of using his authority, he chose to write to the Prime Minister's office, which seems inefficient given his substantial powers over financial institutions.
Regarding recapitalization, Rajan could have planned and executed this process well in advance to align with Basel III norms. Instead, the issue was left to be dealt with hurriedly, potentially compromising the financial health of banks.
Rajan also had the means to fund the MSME sector more effectively and devise plans to reduce the burden on the National Company Law Tribunal (NCLT). These reforms could have provided a robust framework for resolving non-performing loans and enhancing the overall performance of the banking sector.
The question of why Rajan is now pointing fingers out of office instead of taking responsibility for the actions (or lack thereof) during his tenure is also a pertinent one. Should a leader who had the power and responsibility to set India's financial systems right, choose to rationalize his inaction, particularly after stepping down from his position?
Reform Suggestions for the Indian Financial System
Instead of addressing the current issues, such as gold imports, it would be more beneficial to implement meaningful reforms in the Indian banking and financial systems. For instance, promoting reforms that incentivize the production of lower karatage jewelry can help reduce gold imports while maintaining the demand for gold ornaments. This approach would be more effective and sustainable than merely implementing a ban or import taxes, which can often lead to short-term gains at the cost of long-term stability.
As we evaluate Rajan's legacy, it is essential to consider not just his accomplishments but also his inactions and the impact they have had on India's financial sector. It is time to reflect on what could have been different if he had taken a more proactive approach to reform and what changes we need to make moving forward to ensure a more robust and resilient financial system.