Raghuram Rajan tells critics: Have read my obituaries, don’t write me off

“I read these obituaries in the papers, I am still alive. I will leave this office in September, but I certainly will be coming in and out of the country on numerous occasions. I will be reading and writing and I will be speaking at fora like this,” he said during a speech organised by industry lobby Assocham.

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Rajan said the slowdown in credit growth in India is a direct consequence of the stress in public sector banks on account of bad loans, and not due to high interest rates.

He used the occasion to explain at length the agenda he has pursued in the last three years amid criticism from within the NDA government. Defending his policy prerogatives, Rajan said a “clean up of the balance sheets of public sector banks”, which has been initiated under his watch, “needs to be taken to its logical conclusion”.

“The bottom line is that easier monetary policy is no answer to serious distress, contrary to widespread belief,” he said. Comparing lending data for banks in recent years shows that public sector lending has dropped while private sector bank lending has sustained and grown, he said. “These charts refute another argument made by those who do not look at the evidence — that stress in the corporate world is because of high interest rates. Stress is because of the loans already on PSB balance sheets, and their unwillingness to lend more to those sectors to which they have high exposure,” he said.

“To the question of what comes first, clean up or growth, I think the answer is unambiguously: clean up. Indeed, this is the lesson from every other country that has faced financial stress. It is important, therefore, that the clean up proceeds to its conclusion, without any resort to regulatory forbearance once again,” he said. “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 that over the last three years, the RBI has effectively “been trying to create an entirely new bad loan resolution process in the absence of an effective bankruptcy system” and new tools have created a resolution system that replicates an “out-of-court bankruptcy” system. “The good news is that banks are getting into the spirit of the clean up, and pursuing reluctant promoters to take necessary steps to rehabilitate projects. Indebted promoters are being forced to sell assets to repay lenders,” he said.

The RBI Governor said he was glad the Prime Minister has been supporting prosecution in cases of major fraud. “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,” Rajan said. He also said that the RBI is monitoring the Brexit vote in Britain closely and will intervene to keep Indian markets “well behaved” if required. With PTI