Raghuram Rajan gives himself clean chit on rates; here’s why

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Updated: June 23, 2016 7:52:42 AM

A couple of days after hitting out at those criticising the Reserve Bank of India (RBI) for keeping interest rates elevated, governor Raghuram Rajan on Wednesday said public sector banks’ (PSBs’) reluctance to lend to certain stressed sectors, and not high interest rates, was the reason behind anemic credit growth in the economy.

Indicating that the current NPA crisis wouldn't have inflated as much as it has had the RBI been stricter earlier, Raghuram Rajan said forbearance comes back to bite if economic growth doesn't pick up as expected. (PTI)Indicating that the current NPA crisis wouldn’t have inflated as much as it has had the RBI been stricter earlier, Raghuram Rajan said forbearance comes back to bite if economic growth doesn’t pick up as expected. (PTI)

A couple of days after hitting out at those criticising the Reserve Bank of India (RBI) for keeping interest rates elevated, governor Raghuram Rajan on Wednesday said public sector banks’ (PSBs’) reluctance to lend to certain stressed sectors, and not high interest rates, was the reason behind anemic credit growth in the economy.

“Interest rates set by private banks are usually equal or higher than the rates set by public sector banks. Yet their credit growth does not seem to have suffered. The logical conclusion, therefore, must be that it is not the level of interest rates that is the problem,” Rajan said at an event organised by industry body Assocham in Bengaluru.

Also read | RBI sets up fraud monitoring cell, says Raghuram Rajan

That when it comes to growth in personal loans, especially home loans, PSBs have been on a par with their private sector peers is proof that it’s not the lack of capital either which has been responsible for such below par growth, he argued. “Rather than an across-the-board shrinkage of public sector lending, there seems to be a shrinkage in certain areas of high credit exposure, specifically in loans to industry and to small enterprises,” Rajan, who has opted out of a second term as the RBI governor, said.

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The former International Monetary Fund (IMF) chief economist, who had famously predicted the global financial crisis years in advance, attributed ‘irrational exuberance’ in the middle of the last decade to the current non-performing asset (NPA) crisis, while not ruling out malfeasance and/or fraud in some cases. “A number of genuine committed entrepreneurs are in trouble, as are banks that made reasonable business decisions given what they knew then,” he said, adding that such phenomenons are a part of economic cycles and are common across countries.

Rajan, who has been criticised by many in the ruling Bharatiya Janata Party (BJP) for his outspoken views on the ‘intolerance’ debate and India being a ‘bright spot’ in the global economy, also used the occasion to criticise the public sector banking system, which he said makes it difficult for executives to follow sound banking principles.

“The short tenure of managers means they are unwilling to recognise losses immediately, and more willing to postpone them into the future for their successors to deal with. Such distorted incentives lead to over-lending to or ever-greening unviable projects,” he observed.

Rajan, whose three-year term as RBI governor ends on September 4, also hit out at the committee-based approach to loan approval in banks, which, he said, diffuses bankers’ responsibility for loan decisions and also criticised those, like BJP leader Subramanian Swamy, who have blamed the central bank’s policies under him for the current NPA crisis. “The regulator cannot substitute for the banker’s commercial decisions or micromanage them or even investigate them when they are being made. Instead, 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, he said.

Indicating that the current NPA crisis wouldn’t have inflated as much as it has had the RBI been stricter earlier, Raghuram Rajan said forbearance comes back to bite if economic growth doesn’t pick up as expected.

‘Govt should use dividend money to recapitalise public sector banks’

Bengaluru, June 22: Reserve Bank of India (RBI) governor Raghuram Rajan on Wednesday advised the government to inject fresh capital into public sector banks, especially weaker ones, to enable them to meet the credit demands from the industry. “The government should use the huge amount of dividend paid by RBI and infuse fresh capital into the banks. We have paid `1.50 lakh crore of dividend to the government in the last three years, which should be used to recapitalise public sector banks,” Rajan said.

Speaking at an interactive session organised by industry body Assocham here, Rajan said the public sector banks have failed in meeting the credit need from various sections of the society, be it industry, agriculture or services, while their peers from the private sector have achieved a credit growth of 20-25% to various sectors.

Responding to query on banks not providing enough funds to start ups, Rajan said “Banks look for strong collateral, which start ups are unable to furnish. And bankers don’t go by the intellectual property or software created by them which is in the cloud. There has been a 40 times growth in the angel funding in the last four years which understand the start up eco-system better than banks.”

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