Bad debts responsible for low credit growth: RBI guv

Opposes using RBI reserves to recapitalise banks

Reserve Bank of India Governor Raghuram Rajan on Wednesday said bad debts, rather than high interest rates, impinged on public sector banks ( PSB)’ ability to lend and a regulator has no say on how a credit decision is taken but at best raise red flags and force balancing measures.

“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,” Rajan said at an interactive meeting with industry and trade in Bengaluru, organised by Assocham.

“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,” said Rajan.

Rajan has been criticised a number of times for not letting interest rates fall in an economy that is growing at a slow rate. He said if high interest were responsible for lower growth, private sector banks also would have gone slow on credit growth. Rather, credit growth in private banks is at a healthy clip compared with the public sector lenders because the private banks do not have to deal with as much stress as government banks have to, he said.

The fact that PSBs are growing aggressively in personal and housing loans suggest that they are shrinking exposure to infrastructure and industry risk, from early 2014, because of mounting distress on past loans, Rajan said. Most of the bad loans now were made in the high growth phase of 2007- 08, fooling bankers to exhibit “ irrational exuberance” in their lending decision. At the same time, slow decision making by the government has also to be blamed for the bad debt pile- up.

“A variety of governance problems coupled with the fear of investigation slowed down bureaucratic decision making in Delhi, and permissions for infrastructure projects became hard to get. Project cost overruns escalated for stalled projects and they became increasingly unable to service debt.” Rajan also defended the RBI’s stance in introducing various restructuring schemes and the constant tinkering of them, stating the central bank has to do so in the absence of an effective bankruptcy resolution mechanism.

For the heavily indebted promoter, “easier monetary policy will typically bring no relief”, as even with lower policy rates, a bank will have no incentive in reducing interest rates at a time when there is no competition for disbursing loans. “ Capital infusion into weak banks should ideally accompany an improvement in governance, but given the need for absorbing the losses associated with balance sheet clean up, better that government capital be infused quickly,” Rajan stressed, however, using RBI reserves to recapitalise banks, as suggested by the Economic Survey, would be non- transparent and make RBI the owners of banks, resulting into conflict of interest.

Rajan maintained banks would avoid lending to start- ups without collateral following a global trend and said alternate risk investments such as angel and venture capital funds have grown by about 40 times in the past five years.

Business Standard New Delhi, 23th June 2016