Finance minister warns banks against indiscriminate lending

Finance minister Arun Jaitley on Monday cautioned banks against growing credit at a high rate of 28-31 per cent, warning that this would amount to indiscriminate lending and sow seeds for future bad loans. “If we have growth on the basis of 31 per cent or 28 per cent credit offtake, history will record it as growth on the back of indiscriminate lending. One lesson that all of us must learn — moderation, rather than just running after numbers,” said Jaitley, addressing bank chiefs through a video-conference at the annual general meeting of the Indian Banks Association.

Jaitley said that high credit growth in the past resulted in creating surplus capacities and funding projects that were unable to support debt taken for them. “The next error we did was to start dressing up and evergreening money that was owed to the banking system,” he said. “One lesson is that when we desire to have a higher growth rate — it must be supported by good macroeconomic fundamentals. For the management of the economy, growth has to be with fiscal prudence, macroeconomic fundamentals and, therefore, growth has to come with normal, reasonable credit offtake,” said Jaitley.

He said that while the macroeconomic fundamentals were strong, the country faced external risks. These include volatile oil prices and trade wars. “Though we are not participants, the impact can be seen in India, particularly when there is a tendency among large economies to devalue or undervalue their currency,” said Jaitley. He also cited sporadic issues like the ones in Turkey that impact India. “It’s incumbent on us that domestic fundamentals are strong so that we have the resilience to meet external challenges,” he said.

Pointing out that India was the only large economy growing at 7.5 per cent and was likely to move from sixth largest to fifth largest next year, Jaitley said, “Over the next few years, we have to target No. 4 and No. 3 (ranks).” Jaitley told bank chiefs that the challenges before them are of professionalism, expansion, and credibility. “The role of banking has been vital in the past and will be more vital in future and I am sure that you will introspect the journey of last few years, which has been very challenging, and search for a better road map for the banking system,” Jaitley told bankers.