"Clean up!" Rajan's clear message to banks

The Reserve Bank of India Governor Raghuram Rajan, on Wednesday urged that there is a need to get public sector banks into lending to the industry and infrastructure, else credit and growth will suffer as the economy picks up. He was speaking on 'Resolving stress in the banking system' at an event organised by Assocham in Benguluru.

"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.

Rajan last year undertook a massive overhaul of banks' stressed ‎assets, asking each bank to provision for all assets which could potentially sour by March 2016. 

For this, Rajan had set a deadline of March 2017 for them to clean up the bad loans on their balance sheets. 

Today, in his speech, Rajan also underlined that, "Whenever one sees a slowdown in lending, one could conclude there is no demand for credit – firms are not investing. But what we see here is a slowdown in lending by public sector banks vis a vis private sector banks. Why is that?".

According to a PTI report, in 2015-16, the credit growth has hit a near six decade low at around 8.6%, while bad loans in the system have crossed 13% at over Rs 8 trillion in last fiscal year.

Further, he said, that the clean-up of the balance sheet of public sector banks will create room for lower interest rates. 

This was clearly in defend of his decision to hold back high interest rates as his focus was to fight inflation, in which he was successful as CPI came down from double digit to single digit. 

"In sum, to the question of what comes first, clean up or growth, I think the answer is unambiguously “Clean up!”. Indeed, this is the lesson from every other country that has faced financial stress. It is important, therefore, that the clean-up proceeds to its conclusion, without any resort to regulatory forbearance once again", Rajan added.