‘Drop in credit due to past mistakes of banks’

MUMBAI: Slowdown in credit growth is due to past lending mistakes that created stress in government banks and not because of high interest rates, Reserve Bank of

MUMBAI: Slowdown in credit growth is due to past lending mistakes that created stress in government banks and not because of high interest rates, Reserve Bank of India governor Raghuram Rajan said on Tuesday.

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Speaking at the 10th Statistics Day Conference 2016, Rajan said, “Specifically, monetary policy has not been too tight. Instead, I will argue that the slowdown in credit growth has been largely because of stress in the public sector banks, stemming from past mistakes in lending. This will not be fixed just by a cut in policy rates.”

Rajan dismissed the belief in some quarters that the RBI has hurt economic growth by keeping interest rates and borrowing costs too high, which reduced credit and but had little effect on inflation.

“The RBI, of course, stands by its policies. Nevertheless, this debate is very important because it could shape policy directions in India over the medium term ,” he said.

According to Rajan, whose term ends on September 4, said: “Fortunately, after an initial reluctance, banks have entered the spirit of the clean-up. The stock market, after reacting negatively, was more supportive of public sector bank stock prices, probably reflecting the belief that the clean-up was good over the medium term.”

Citing lending statistics, Rajan said that non-food credit growth in public sector banks has been falling relative to new private sector banks since early 2014. He implied that the problem is not that demand for credit is low because interest rates are too high as that would have led to a slowdown in credit across the board.