No ‘Lehman moment’ possible in India, firewalls in place: Rajan

  • PTI, London
  • Updated: May 14, 2016 01:34 IST
Rajan, who has often been criticised for being too economical with rate cuts, also indicated that RBI’s rate cuts were not the only instrument to boost growth. (File photo)

Confident of clearing up the bad-loan mess, RBI governor Raghuram Rajan said on Friday there is “absolutely no chance of a Lehman moment” in India and a three-cornered firewall was being created to safeguard the economy from external shocks.

He also rejected calls for any immediate privatisation of public sector banks and said the urgent need was to clean up their balance sheets and no private investor would anyway come without a cleaner balance sheet.

Rajan, who has often been criticised for being too economical with rate cuts, indicated that rate cuts were not the only instrument to boost growth.

“I think the real way we are trying to firewall the economy is, on the first hand, with good policies, including as I said, the moves on reforms that have been enacted recently. The second is by trying to increase the maturity of our debt. We have substantially increased the maturity of debt, external debt that we owe. The third is we built-up reserves,” he told CNBC news channel in an interview.

Asked about bad loan problem in India being bigger than the size of New Zealand’s $170 billion economy and whether there was risk of a banking crisis, Rajan said, “I do not think it’s that big. Second, many of bad assets are in public sector banks and the government fully guarantees them.

“So, there is absolutely no chance they will fail. There is also absolutely no chance there will be a Lehman moment.”

It was the collapse of Lehman Brothers, once a giant banking institution, that began a severe financial crisis in the US in 2008.

“It is about ensuring that the assets are cleaned up and investors have a good idea of the balance sheets of the bank and that process is under way and some banks have cleaned up much faster than the pace that we had set for them,” he said.

On whether he should privatise some banks and can that reduce some of the inefficiencies, Rajan said, “I think, over time as we improve the governance in the banking system, that question can be addressed. At this point, the real issue is for most of these banks clean up their balance sheets without it is hard to imagine a private investor coming in without clean balance sheet.

“Also, many of them have the capacity to sustain the existence as public sector entities provided we improve the governance. Now, we have a Banks Board Bureau which has been set up primarily to distance itself from the government and to make a number of governance decisions including for appointments for the banks.

“My sense is we can do a lot without actually going to the point of privatisation. That’s a decision the government will have to take down the line,” he said.

Easier to file tax returns in India

Rajan said he found it easier to file his tax returns in India, as compared to in the US.

He also asserted that developed nations must do their part in tackling the problem of corruption as money taken out illegally from developing countries often find its way to places like London.

Replying to a question on whether corruption in India remained a big issue, the central banker said, “It is an important tax on the system which impedes good decision making and impedes economic growth.”

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