Raising a red flag against excessive lending to the infrastructure sector, Reserve Bank governor Raghuram Rajan on Thursday warned that the push to finance infrastructure should not override financial stability.
“The nation has enormous financing needs in infrastructure, and far too many of our banks already have too much exposure. Big corporate infrastructure players have also taken too much debt. Going forward, we need to develop new sources of risk capital so that our infrastructure needs can be financed with moderate amount of debt, even as we help the system deleverage,” Rajan said at a conference to mark the 80th foundation day of the RBI here.
The RBI recently said the real estate and housing sector now accounts for 13-14 per cent of the banks’ exposure. When infrastructure loans are included, the total exposure rises to 25 per cent of total loans. While exposure to the real estate sector has gone up from Rs 60,000 crore in 2007-08 to Rs 1,54,000 crore now and housing exposure from Rs 2,60,000 crore to Rs 5,40,000 crore, infrastructure exposure has more than doubled to Rs 8,40,000 crore. Some of the infra loans extended by banks in the last couple of years have already become stressed assets.
Referring to autonomy for institutions like the RBI, Rajan said, “strong national institutions are hard to build. Therefore, existing ones should be nurtured from the outside, and constantly rejuvenated from the inside, for there are precious few of them.”
According to Rajan, the RBI is respected for its integrity. “It is a matter of great pride for me today that when someone enters our building to persuade us to change a regulation, they come armed not with money but with arguments about what is right,” he said.
He said the country’s most important financial challenge is to bring financial services to every doorstep and to every small enterprise. “The poor are still too far away from, or too uncomfortable stepping into bank branches,” he said.
On the banking sector, he said, “our intent is to create an ownership-neutral, institution-neutral, technology-agnostic level competitive arena. For example, technologies enabling touch-and-go payments will find use even as banks focus on acquiring and analysing information and reducing transactions costs as they compete to extend financial services to all.” The RBI’s state-of-the-art payments system will support technology, even as the bank strengthens its cyber-supervision, he said.
“We need deep markets to absorb risks that stay too often in banks or in corporations. Here, too, our track record has been strong. Though many developing country governments are forced to borrow only in foreign currency, the Reserve Bank has fostered a liquid rupee government bond market, where the government today is able to contemplate issuing 40 year bonds,” Rajan said.