Raghuram Rajan rules out failure of banks in India

Confident of clearing up the bad-loan mess, RBI governor Raghuram Rajan on Friday said that there is “absolutely no chance of a Lehman moment” (failure of banks) 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 and no private investor would anyway come without a cleaner balance sheet.

Dr Rajan also indicated that rate cuts were not the only instrument to boost growth.

Asked about bad loan problem in India being bigger than the size of New Zealand’s $170 billion economy and whet-her there was risk of a banking crisis, Dr Rajan 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, Dr 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.”

“What we need to do is restructure the debt for some of these projects, put them back on track. It is not that there are acres of real estate that are unoccupiable. It’s actually a power plant that can produce power and India is a growing economy that needs power,” he said.