Raghuram Rajan reiterates: Not high rates but stress in PSBs led to slowdown

Bengaluru:  Slowdown in credit growth has been largely because of stress in the public sector banking and not due to high interest rates, Reserve Bank of India (RBI) Governor Raghuram Rajan said on Wednesday. [caption id=“attachment_2842840” align=“alignleft” width=“380”]  RBI Governor, Raghuram Rajan[/caption] “I will argue that the slowdown in credit growth has been largely because of stress in the public sector banking and not because of high interest rates,” Rajan said at an interactive session with captains of industry and trade here. Referring to the central bank’s role in changing the culture surrounding the loan contract, the governor said clean-up of the balance sheets of public sector (state-run) banks was underway to its logical conclusion. “Public sector bank non-food credit growth has been falling relative to credit growth from the new private sector banks (Axis, HDFC, ICICI, and IndusInd) since early 2014. This is reflected not only in credit to industry, but also in micro and small enterprise credit,” Rajan said addressing about 300 members of Assocham trade body on ‘Resolving Stress in the Banking System’. Noting that the slowdown in credit growth was also seen in agriculture, though growth was picking up once again, Rajan said slowdown in lending was in public sector banks than in private sector banks. “Whenever one sees a slowdown in lending, one could conclude there is no demand for credit - firms are not investing. The immediate conclusion is that something is affecting credit supply from the public sector banks specifically, perhaps it is the lack of bank capital,” the governor said, with charts in a powerpoint presentation. Observing that personal loan growth, especially of housing loans in a state-run bank was as good as that of private sector bank, Rajan claimed that lack of capital could not be the culprit. “Rather than an across-the-board shrinkage of public sector lending, there seems to be shrinkage in certain areas of high credit exposure, specifically in loans to industry and small enterprises,” he pointed out. Admitting that public sector banks were shrinking exposure to infrastructure and industry risk since early 2014 because of mounting distress on their past loans, Rajan said, private banks, many of which did not have past exposures, were more willing to service the demand from traditional borrowers and some corporates denied by the former. “Given that state-run banks are much bigger than their private counterparts, the latter cannot substitute for the slowdown in the former’s credit. We need to get public sector banks back into lending to industry and infrastructure, else credit and growth will suffer as the economy picks up,” Rajan asserted.