Clean-up of bad debts a must for future growth, says Raghuram Rajan

Growth will follow the clean up of the bank balance sheets, said RBI governor Raghuram Rajan in a reference to the belief by some banks that once the economy turns around their balance sheets will improve.

Speaking at the CII Banking Summit here on Thursday, he observed that banks are not lending today as they are worried about their stressed assets and feel that if they lend more they will be adding to their NPAs.

On the contrary, he said, the only way for them to supply the economy’s need for credit is to clean up their balance sheets.

In deed, this is the lesson from every other country that has faced financial stress, he said.

While growth will help the system, it would likely be significantly impaired if we did not nudge the process of clean-up. He pointed out that non-food credit growth from public sector banks, the more stressed part of the system, grew at only 6.6 per cent over 2015.

Industrial credit growth for PSBs was only 3.3 per cent while growth in lending to agriculture and allied lending was only 10.4 per cent. The only area of strength was personal loans, where growth was 16.9 per cent. In contrast, non-food credit growth in private sector banks was 20.2 per cent, in agriculture 25.4 per cent, in industry 14.6 per cent, and 23.5 per cent in personal loans.