Should Rajan go or stay? Is he an asset or a liability? Is the Modi government making a mistake in not nominating him for a second term?
Well, people have different opinions on the issue. Therefore, at this juncture, it would be prudent to look at Rajan’s most important contribution during his tenure as RBI Chief.
Under Rajan, the RBI forced both the public sector and private sector banks to recognize rotten loans.
What happened earlier was that ‘dead and dying loans’ used to be classified as ‘performing loans’. This myth of robust paper profits allowed many private sector banks to reward their staff with great salaries and bonuses.
The Rajan clean-up has resulted in suppressed profits or in outright reported losses for the banks, thereby giving a truer picture of the state of affairs.
Assume that a bank X has given a loan of Rs 100 which is a bad debt. The balance sheet of the bank shows Rs 25 as overall loss. This bad loan is then categorized as a ‘performing loan’ which then shows the bank in a profit of Rs 75 and the CEO and everyone else get rewarded and the stock value goes up. Rajan put an end to such practices.
