Indiscriminate lending led to banking crisis, says FM Arun Jaitley

Jaitley added that bankers cannot be punished for honest decisions taken with commercial prudence that turned out to be erroneous or commercially unsuccessful with the passage of time

Indiscriminate lending and penalising bankers instead of empowering them to take the right decisions has led to the current crisis, said Finance Minister Arun Jaitley during a meet of the Indian Banks’ Association on Monday.

In a reference to the earlier United Progressive Alliance (UPA) regime, Jaitley said the banking crisis was the result of indiscriminate lending done a decade ago. 

“One lesson that I have learnt is that when we desire to have a high growth rate, it must be accompanied by strong macroeconomic fundamentals. If we start sacrificing our macroeconomic fundamentals in order to temporarily push up growth, then we are hurting ourselves elsewhere and that is bound to strike back at the economy at some point in time,” he added, saying credit offtake needs to be moderated.

“Indiscriminate lending to chase growth at the cost of macroeconomic fundamentals was a policy mistake, he said. He added that indiscriminate lending done in the past led to funding projects which were not able to service those debts. This was followed by the subsequent error of dressing up bad loans.

“A system was created where there was reduced ability of bankers to find resolution. It was not a regime of comfort,” he said, adding that bankers were being punished for honest decisions.

Jaitley said some commercial judgment needs to be left to the bankers themselves. He added that bankers cannot be punished for honest decisions taken with the commercial prudence that turned out to be erroneous or commercially unsuccessful with the passage of time.

However, Jaitley said that the challenges to the economy in the past few months have been primarily external, citing unpredictable oil prices, trade wars and sporadic political issues. He added that the domestic sector needs to be equipped to deal with these external threats. 

Jaitley, however, seemed positive about the country’s growth and said that India may probably become the fifth largest economy next year. He added that the country is continuing its run as a fast-growing economy, and will continue to be in this sweet spot.