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Bankers taking too long to recognise frauds, says RBI governor Raghuram Rajan

Industry should cut prices to bring down inflation. It is not just food prices that are keeping inflation high

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Reserve Bank of India (RBI) governor Raghuram Rajan on Monday said bad economy, poor structuring and slowdown in the government is leading to creation of bad loans.

Speaking at the Federation of Indian Chambers of Commerce and Industry-Indian Banks Association banking seminar on Monday, he said allegations of malfeasance like Syndicate Bank cases are impacting the accretion of bad loans in the system.

"I fear that banks are taking too long to recognise frauds in the banking system. There are lots of good people in public sector banks, but need to root out the bad apples, bad practices and weak capabilities. There is a significant rise in NPAs in large projects. Let's not hide the problem, we have given a lot of forbearance to large projects," Rajan said.

Some of the big NPAs in the recent past were Zoom Developers, Winsome Diamonds, Deccan Chronicle and Mahua TV, all of which were discovered after the loot was complete.

"Many sectors in the economy get too little credit. Solution is to develop the financial framework across the board. Should a student loan to study abroad come the under priority sector?," Rajan asked, touching upon the issue of distortion in loan pricing.

Certain sectors of economy like agriculture need credit. Select special sectors need ease of credit; the biggest need for agriculture is long-term money while farmers do not get long-term loans because short -term loans are subsidised, he said.

Interest subventions and loan waivers schemes, Rajan said, would distort prices and lead to unhealthy borrowing practices.

Arundhati Bhattacharya, chairman, State Bank of India, said, "Immediately after a loan waiver scheme the agriculture credit from the banks go down as bankers expect farmers to default expecting another loan waiver. It kills the discipline that the borrowers need to have while borrowing from the banks."

Banks have to direct 40% of the total credit to the priority sector, which includes agriculture, education, rural housing, micro and small sector enterprises.

Rajan cautioned banks on duplication of accounts under the Pradhan Mantri Dhan Yojna, which he said is an internal priority as it would help in direct benefit transfers that will reduce leakage.

He said it was time that the government deregulated diesel prices in the wake of falling global crude oil prices. The fall in inflation has been consistent with RBI's forecast.

It is not just food prices that is keeping inflation high. A whole host of services like medical services, education, travel, hotel and other products are expensive, according to RBI governor.

"The industry therefore should to cut prices to bring down inflation. But will they do it?" he asked.

"I don't want to keep interest rates high. We will bring down interest rates when it is feasible. Right now, inflation is high and the priority is to bring it down, so that growth can revive. We don't have to wait till inflation is down to bring down prices, but we need to be certain that inflation is coming down before interest rates soften," Rajan said.

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