Project financing as important as chasing retail credit: Raghuram Rajan


MUMBAI: Outgoing RBI governor Raghuram Rajan called for a level playing field between public and private sector banks besides expressing concern over the rush into retail credit at the expense of project finance at a time when India needs massive infrastructure funding.

In one of his last speeches before leaving office next month, he reiterated the need to allow public sector banks to decide their own business strategies.

Rajan, who will be returning to his teaching job at the University of Chicago, used his 4,000-word speech to outline a blueprint for the evolution of India’s state-owned banks, which are currently cleaning up their balance sheets. While the speech amounted to the Rajan doctrine on state-owned banks, Rajan said the views were personal.

“These should be viewed as opening a discussion rather than the formal views of RBI,” he said. Rajan said banks in India were subject to a grand bargain—being able to raise lowcost insured deposits in return for government mandates such as opening Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts or making Micro Units Development and Refinance Agency loans. “While it is unclear whether the cost of the mandates outweigh the benefits, they do skew the competitive landscape,” Rajan said.

“Authorities like the central bank and the government should, over the medium term, reduce differences in regulatory treatment between public sector banks and private sector banks, and more generally, between banks and other financial institutions.”

The disadvantage faced by state-owned banks could be mitigated if the government paid an adequate price for its mandates, he said. He also referred to the “authorities’ dilemma” and said regulators should ensure their actions were neutral in relation to institutions, ownership and technology to ensure the most efficient customer-oriented solutions.

Rajan said project financing needs were “enormous” but asked lenders to focus on due diligence. “Even though bankers are risk averse today, and few projects are coming up for financing, this will change soon,” Rajan said. “Bankers will remember the period of irrational exuberance in 2007-2008 when they lent without asking too many questions. I am hopeful this time will be different.”

Banks need to develop in-house expertise, employ risk mitigation, have a flexible capital structure, implement a robust project monitoring and appraisal system and put in place an incentive structure that rewards bankers when projects succeed.

He warned about the rush into consumer-focused credit and said here too risks could be reduced by putting checks in place. “It seems today that, having abandoned project loans, every bank is targeting the retail customer,” the governor said.

“Clearly, the risks in this herding will mount over time, as banks compete for less creditworthy customers. But some of this risk can be mitigated if they do sufficient due diligence.” “It is important that bank boards be freed to determine their strategies,” he said.

“Too much coaching by central authorities will lead to sameness in public sector banks that successive Gyan Sangams have criticised.”

He was referring to conclaves in 2015 and 2016 for state-run banks. “A parallel task is to improve their governance and management,” he said.

“Equally important is to fill out the ranks of middle management that have been thinned out by retirements, and to recruit talent with expertise in project evaluation, risk management, and IT, including cyber security.”

Rajan said over time bank boards should be professionalised and executive appointments devolve from the recently established Bank Board Bureau to the lenders themselves.