Don't overstate bad loan problem: Rajan

Reserve Bank of India Governor Raghuram Rajan on Saturday cautioned against exaggerating the issue of non-performing assets of public sector banks as it hampers lending operations in general, adversely impacting economic growth.

Rajan said, “We have to be careful as we go forward… We don’t (want to) indulge in a broad fishing expedition which then becomes a reason for banks to get worried about making loans which then hamper the recovery as well as the absolutely important investment in infrastructure.”

“So as a country, as a system, we have to draw that balance very carefully and we are hopeful that we can manage that.” Rajan added.

Rajan said well-defined process for identifying wilful defaulters is in place. “Broadly speaking, it may be manoeuvres which divert funds away from the project and elsewhere... We have a process by which people are declared wilful defaulters, we maintain a registry of wilful defaulters and we have strengthened the penalties on wilful defaulters’ ability to raise money from the system,” he said.

“Going forward, I hope the process is streamlined. So my hope is that some of the attention that has been paid to some of these actions will help streamline the system,” Rajan added.

Finance Minister Arun Jaitley echoed the Governor’s point. “We don’t want to create a situation where we overstate the crisis and in the process, the whole activity of lending for growth itself starts suffering because people become extraordinarily defensive. We don’t want to reach that situation,” he said.

The Governor and the Finance Minister spoke to media after Reserve Bank’s board meeting in Delhi. Jaitley hoped that the NPA situation that has been caused by the overall economic environment and slowdown in certain sectors would improve once these sectors start recovering.

Rajan said the central bank’s board gave substantial compliments to the Finance Minister for Budget and fiscal discipline. Jaitley committed to fiscal discipline in his Budget, lowering the deficit target further to 3.5 per cent of gross domestic product in 2016-17.

While saying that the headline fiscal deficit target for the next financial year is a comfort for the RBI, the Governor didn’t give any indication on the market hopes of a policy rate cut. “How that feeds into monetary policy you have to wait and see… Both the markets and RBI are comforted by that. How that feeds into monetary policy is... you have to wait and watch,” he said. RBI is scheduled to announce annual policy for 2016-17 on April 5.

Rajan, however, described the index of industrial production (IIP) contraction for third continued month in January as “disappointing”. He said the economy is recovering, but the process of recovery is volatile. “We are in recovery. That’s broadly what we said before and by and large, we would stick to that. There is volatility in this recovery process. So, it’s not a strong (and) sustained recovery where all the signals are exactly in the same direction,” he said.

“The growth is not as strong as we would like as a country… we have to see how it progresses,” he added. The industrial output contracted 1.5 per cent in January because of poor manufacturing. The declining industrial output prompted India Inc to press for a rate cut by RBI.

Rajan also praised the composition of a planned monetary policy committee, saying he was “absolutely on board and happy with it.”

A Bill before the Parliament proposes a six-member committee, with three members picked by the central bank and three by the government. The governor would break any ties. “It is a very reasonable step forward,” Rajan said. “The monetary process will benefit from this structure.”

On proposed mergers of banks, Rajan said there is a rationale for consolidation of some of the banks, but it can’t “happen overnight”. He expressed hope of finding good candidates for the merger. “Certainly, there is rationale for merging some of the banks. We need as many banks for following a similar strategy as we have,” the governor said.

“The whole sorts of partners are going to be involved, the Bank Board Bureau or maybe, a committee. We are taking into account all these things,” he added.