RBI cautions banks against excessive lending to infra projects

Cautioning banks against excessive lending to the infrastructure sector, RBI Governor Raghuram Rajan on Thursday said such loans should not override the overall financial stability, which is ‘key to national security’.

"The nation has enormous financing needs in infrastructure, and far too many of our banks already have too much exposure.

“Big corporate infrastructure players have also taken too much debt," Rajan said at a function to mark 80 years of RBI in the presence of Prime Minister Narendra Modi and Finance Minister Arun Jaitley.

"The required national push to finance infrastructure should not override financial stability, which is key to national security," he added.

The non-performing assets of banks in the country stood at over Rs 3 lakh crore (Rs 3 trillion) as on December 2014.

Banks had to tide over a tough time as the power sector faced troubles after the Supreme Court last fiscal cancelled the allocation of 204 coal mines by the previous government.

Pushing for investments in infrastructure, Jaitley in the Budget 2015-16 has proposed a sizeable Rs 70,000 crore (Rs 700 billion) increase for the sector besides a slew of steps to spur its growth.

The 12th five year plan (2012-17) envisions $1 trillion investment in the infrastructure sector, of which 50 per cent is expected to come from private sector.

Jaitley had also stressed on the need to revitalise the public private partnership mode of infrastructure development.

Listing infrastructure among five major challenges he has to reckon with, Jaitley had said that it is a challenge for government to increase investment in the sector.

With private investment in infrastructure via the public private partnership model still weak, public investment needs to step in, to catalyse investment, he had said.

Stating that there has always been a ‘constructive dialogue’ between RBI and the government, Rajan underscored the need to nurture strong institutions like the central bank.

"Strong national institutions are hard to build.

“Therefore existing ones should be nurtured from the outside, and constantly rejuvenated from the inside, for there are precious few of them," he said.

The comments from the Governor come in wake of a new set of reports indicating differences between the Mint Street and the North Block following certain budget proposals indicating moving away certain functions from RBI including regulation of government debt and public debt management.

"There has always been a constructive dialogue between the government and the Bank, informed by their respective time horizons and attitudes towards risk.

“And history records that successive governments have invariably appreciated the wisdom of the Reserve Bank's counsel," Rajan said.

Asserting that no one can raise a question mark over RBI's integrity, Rajan said the only currency someone has while lobbying in RBI offices is the depth of the argument and not money.

Rajan said the Reserve Bank has achieved successes on a slew of fronts, the most important of them being tackling inflation despite food shortages, oil prices and wars.

Alluding to the introduction of differentiated banking, Rajan said the next year will see newer players like payments banks, small finance banks and possibly a postal bank competing with existing universal banks.

The RBI's aim "is to create an ownership neutral, institution neutral, technology agnostic level competitive arena", he said.

Image: Prime Minister Narendra Modi (right) shakes hand with Reserve Bank of India Governor Raghuram Rajan at an event on financial inclusion in Mumbai April 2, 2015. Photograph: Danish Siddiqui/Reuters