Raghuram Rajan blames PSB bad loans for slow growth

RBI governor Raghuram Rajan on Wednesday stressed that the slowdown in credit growth has been largely because of stress in the public sector banking and not because of high interest rates.

Speaking at an Assocham interactive meeting with trade and industry in Bengaluru, he said “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.”

He pointed out that the slowdown in lending is by public sector banks vis-a- vis private sector banks.

Refuting the mistaken belief about high interest rates deterring credit growth, Dr Rajan said: “Interest rates set by private banks are usually equal or higher than 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, he said.

Tracing the history of bad loans with PSBs he said is “The more appropriate conclusion is that public sector banks were shrinking exposure to infrastructure and industry risk right from early 2014 because of mounting distress on their past loans. 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,” he said.

Dr Rajan said they were also working on a framework to enhance efficiency and transparency of price discovery in sale of stressed assets by banks to ARCs. The government and the RBI are helping PSU bankers in this difficult but critical task.