Lack of credit growth because of NPA not high interest rates, says Raghuram Rajan

RBI Governor Raghuram Rajan

Reserve Bank Governor Raghuram Rajan on Wednesday said that the slowdown in credit growth is not because high interest rates but banks are averse to lend because of mounting bad loans.

The outgoing Governor argued that if high interest rates are the reason for lower credit growth then why are private sector banks’ loan book is growing at a faster pace than their public sector counterparts.

“Public sector bank non-food credit growth has been falling relative to credit growth from the new private sector banks (Axis, HDFC, ICICI, and IndusInd) since early 2014,” Mr Rajan said in a speech in Bangaluru, named, "Resolving Stress in the Banking Sytstem" while addressing at an interactive meeting with industry and trade.

Public sector banks share a disproportionate burden of stress than private sector banks.

The Governor emphasised on the need of getting back public sector bank into lending to support growth.

“Given that public sector banks are much bigger than private sector banks, private sector banks cannot substitute fully for the slowdown in public sector bank credit. We absolutely need to get public sector banks back into lending to industry and infrastructure, else credit and growth will suffer as the economy picks up,” he said.