Financial discipline will help lower lending rates, says Rajan

Reserve Bank of India governor Raghuram Rajan has called for better financial discipline at both the lending and borrowing ends before corporates and banks seek lower interest rates.

Indian companies by over-leveraging bank credit are piling up debt to unserviceable levels and it is these huge non-performing assets that force banks to keep lending rates high, Rajan said at a post-policy media interaction.

He said it is for the borrower to decide the amount of risk-free loans he can take while the lender should better assess the repayment capacity of the borrower to make credit transactions smoother.

"I also see that there is a whole lot of confusion. The immense risk premium that is being demanded of some corporate houses is because of the state of their leverage, because of the risks they have taken, and because of their inability or unwillingness to repay. This should not be attributed to RBI. What we control is risk-free rate, what they can control is the risk premium demanded of them. This is something they should work on, even as we are working on bringing down inflation and a risk-free rate that they have to pay," Rajan said.

"The section calling for interest rates cut to boost growth in a quarter are shortsighted. RBI is not against growth. I think there is a misconception in corporate India. The RBI is certainly not against growth.

''We want the strongest growth rate for this country. That means creating a framework to make sustainable growth possible. We have been working on that framework and we are nearly there. I would say, bear with us. Hopefully, if we can reach there and stay there, we will see many years of strong growth," Rajan told reporters in Mumbai.

"I think it is very short-sighted when people comment you are not helping growth this quarter. We are not talking about quarters, we are talking about years of sustainable growth. To get that, you need to fight inflation," Rajan said.

"If bankers cannot get their money back, they are not going to give you loans at cheap rates. So... making sure debt-recovery tribunals work better, making sure that you don't have excess number of stays, excess number of appeals - that is what we need to focus on... There is a certain category of promoters deliberately standing in the way (of loan recovery). There, we have to send a strong message... that kind of action is intolerable in the Indian scenario and you will not get away with it. We are talking with the government, and trying to deal with it," Rajan said.

RBI, Rajan noted, had promised more flexibility to banks while restructuring corporate loans, but for banks to have leeway the NPA pile should come down. Banks continue to raise risk premiums on interest rates due to over-borrowing by big corporates, he added.

Meanwhile, a DNA report quoted SBI chief Arundhati Bhattacharya as saying that bad debt is the villain – that banks would be able to reduce lending rates if bad debts come down.

"The borrowing cost remains high for companies where the leverage is high. And the high bad debts also force banks to keep interest rates. If we are able to cut our NPA ratios, it will certainly result in lower borrowing cost for banks. Now companies are also accessing the equity markets and if they are able to raise more equity, then banks would be in a better position to lower lending cost. If companies are able to maintain financial discipline banks are in a better position reduce interest rates," the paper quoted her as saying.

The SBI chief, however, defended banks against RBI chief Raghuram Rajan blaming them for high interest rates and not transmitting the money market benefits, saying that banks get very little resources from this market.

"Banks get very little resources from the money market. For instance, SBI does not have a single CD (Certificate of Deposit) in the market and so to that extent the rates coming down in the money market won't really impact us. Therefore, there is no question of transmission. My resources are deposits and not money market instruments. I have no CDs in the market and so transmission from my side doesn't come in at all," she told reporters on the sidelines of the press meet after RBI's policy announcement in Mumbai.