Five key things that RBI Governor Raghuram Rajan said at Assocham event

His views are on topics ranging from bad loans, low credit growth to willful defaulters

RBI Governor Raghuram Rajan, on Wednesday, said that the bad loans problem, and not higher interest rates, was responsible for slowdown in credit growth. Rajan also said that the regulator must not be held responsible for the current mess. 

The Governor, at an interaction organized by Assocham in Bengaluru spoke on a range of issues which had led to the bad loans situation in the country and the problems that plagued the banking sector. 

Business Standard presents top five things he said during the talk. 

Bad loans

- Bankers sometimes turn around and accuse regulators of creating the bad loan problem. The truth is bankers, promoters, and circumstances create the bad loan problem.

- 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.

- The Economic Survey has suggested the RBI should capitalise public sector banks. This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, with attendant conflicts of interest. Better, is to pay the government the maximum dividend that the central bank can and that’s what the central bank has been doing.

Slowdown in credit growth

- (It) has been largely because of stress in public sector banking and not by high 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

Lending to industry and infrastructure

- We absolutely need to get public sector banks back into lending to industry and infrastructure; else credit and growth will suffer as the economy picks up.

- There are two sources of distressed loans — the fundamentals of the borrower not being good, and the ability of the lender to collect being weak. Both are at work in the current distress.

Bad loans recovery

- Knowing that banks would find it hard to collect, some promoters encouraged them to “double-up” by expanding the scale of the project, even though the initial scale was unable to service debt. Cleaning up bank balance sheets are, therefore, more important than anything else to spur credit growth in the economy.

Fraudsters and wilful defaulters

- For fraudsters, quick and effective investigation by the investigative agencies is extremely important. We should send the message that no one can get away, and I am glad that the Prime Minister’s Office is pushing prosecution of large frauds.

- And for those who have diverted money out of their companies, especially into highly visible assets abroad, a stern message sent by bankers sitting together with investigative agencies should help send the message that the alternatives to repayment can be harsh.