Confident of clearing up the bad-loan mess, Reserve Bank of India (RBI) governor Raghuram Rajan on Friday said 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.
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.
Asked about bad loan problem in India being bigger than the size of New Zealand’s $170-billion economy, the RBI governor 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.
Admitting that the banking sector is under stress in India, Rajan said: “Ours is not a retail problem. It is a wholesale problem. There are big projects...and it is not because of connected lending or corruption. It was because the world changed.”