Rajan Says India Should Finish Banking Cleanup in Policy Defense

  • Calls for improved governance, capital injections from gov’t
  • ‘Easier monetary policy is no answer to serious distress’

Indian central bank Governor Raghuram Rajan said government-run banks were to blame for a slowdown in credit growth, not high interest rates.

Rajan, who announced on Saturday that he would step down in September, called for improved governance and more capital injections into state-run banks. It was his second speech this week defending his policies after he called on Monday for his successor to keep up his fight against inflation.

“To the question of what comes first, clean up or growth, I think the answer is unambiguously ‘Clean up!’" Rajan said in Bengaluru, according to a text of his remarks. “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."

To read more on Rajan’s efforts to clean up the banking system, click here.

Rajan’s exit has spurred concerns that his successor may abandon his March 2017 deadline for banks to clean up more than $100 billion of stressed assets on their balance sheets. With bad loans at a 15-year high, the project is a crucial step toward reviving credit growth and bolstering India’s $2 trillion economy.

Bank Recapitalization

Rajan rejected arguments that easier monetary policy would help reduce bad debts, saying that banks still wouldn’t have incentives to reduce interest rates.

“The bottom line is that easier monetary policy is no answer to serious distress, contrary to widespread belief," Rajan said.

Rajan also spoke out against using central bank funds to recapitalize public-sector banks. The government had earlier suggested using the Reserve Bank’s own capital to either be directly injected into public-sector banks or used to create a “bad bank" to resolve soured debt.

“This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, with attendant conflicts of interest," Rajan said.