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RBI chief Rajan says bad loans, not higher rates, damping credit growth

By PTI
22 June, 2016

Taking on critics of his monetary policy, Reserve Bank Governor Raghuram Rajan on Wednesday blamed the record low credit growth to the stress in public sector banks and not due to high interest rates.

“I will argue that the slowdown in credit growth has been largely because of stress in the public sector banks and not due to high interest rates,” Rajan said in a speech on ‘Resolving stress in the banking system’ organised by the industry lobby Assocham here on Wednesday evening.

At the same time he underlined the need for bank lending to the industry, saying “we absolutely need to get public sector banks back into lending to the industry and infrastructure, else credit and growth will suffer as the economy picks up.

“It is not the level of interest rates that is the problem, instead, the loans already in public sector banks’ balance sheets are stressed, and therefore their unwillingness to lend more to those sectors to which they have high exposure,” Rajan emphasised.

Credit growth has hit a near six-decade low in 2015-16 at around 8.6 per cent, while bad loans in the system have crossed 13 per cent at over INR 8 trillion in last fiscal year.

Last month, BJP parliamentarian Subramanian Swamy had attacked the Governor and called for his dismissal from the post as he was responsible for “unemployment and collapse” of the industrial activity in the country apart from not “being fully Indian mentally”.

“In my opinion, the RBI Governor is not appropriate for the country. He has hiked interest rates in the garb of controlling inflation that has damaged the country,” Swamy had said. The BJP leader had also shot off many letters to the Prime Minister seeking Rajan’s dismissal.

Rajan, who took charge as RBI Governor on September 4, 2013, had gradually raised the short-term lending rate from 7.25 per cent to 8 per cent and had retained the high rates throughout 2014.

He kept the rates high, citing inflationary concerns despite intense pressure from the finance ministry and the industry for softening them with a view to boosting growth.

Rajan began the process of lowering the rates only in January 2015 and since then it has come down by 1.50 per cent to 6.50 per cent.

The Governor on Wednesday suggested that if banks’ books are cleaned up, it could create room for lower interest rates.

“As such, what is required is a clean-up of the balance sheets of public sector banks, which is what is underway and needs to be taken to its logical conclusion,” Rajan said defending his decision to hold rates high as he took fighting inflation as a mission up on himself, in which he was successful as CPI inflation came down from double digits to low single digit.

Rajan further said bankers sometime turn around and accuse regulators of creating the bad loan problem.

“The truth is bankers, promoters, and circumstances create the bad loan problem,” he said.

The regulator cannot substitute for the banker’s commercial decisions or micromanage them or even investigate them when they are being made, Rajan said.

The Governor said in most situations the regulator can at best warn about poor lending practices when they are being undertaken, and demand banks hold adequate risk buffers.

“The important duty of the regulator is to force timely recognition of NPAs and their disclosure when they happen,” he noted.

He further said the cleaning up of bank balance sheets, and the restoration of credit growth are vital, related elements in the growth agenda.

“The government and the RBI are helping our public sector bankers in this difficult but critical task. I know the process is working, so public sector banks will soon be set to finance the enormous needs of this economy once again,” the Governor added.

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RBI chief Rajan says bad loans, not higher rates, damping credit growth

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