Davos 2023: Raghuram Rajan cautions Indian banks on aggressive retail bet, warns of risks

Former RBI governor Raghuram Rajan said too much of investments have been made in making chips globally.

Former Reserve Bank of India (RBI) Governor Raghuram Rajan has cautioned Indian banks on their aggressive tilt towards retail lending, flagging potential risks involved in the event of a downcycle.

“If you see, banks in India are moving towards retail lending. Are they pricing properly? Are banks looking at the risks involved?,” Rajan told Moneycontrol in an exclusive interview on the sidelines of Davos 2023.
The former RBI governor’s comments assume significance in the context of an aggressive retail bet by Indian banks in recent years. Most banks have witnessed significant jump in retail assets compared with wholesale loans.

Highlighting the problems with infrastructure lending in the past, Rajan said banks have to make sure that all the risks involved are checked.

“In 2007,2008 and 2009, we moved towards infrastructure loans because they played out well at the time. But afterwards, they created problems,” Rajan said.

Asset quality

Talking on the asset quality front, Rajan said that there has been some significant progress made on the repayment side. He said: “We've made real progress, some business houses have paid down a lot of their debt.”

But cautioning on how bad loans start emerging when lenders become complacent, Rajan said “Experience from the pandemic is that we haven't seen build up of bad loans from small and medium-sized enterprises (SMES). They have been trying to pay down their bad debt.”

MC AT DAVOS: Full coverage

Highlighting concerns on India’s growth and problems with the banks, Rajan said: “India has always been optimistic but this year you have to be careful about the numbers due to a rebound from a bad quarter towards the end of last quarter.

Also read: What's the recipe for India's fast economic growth? Raghuram Rajan shares his insights at WEF, Davos

And the major problem with banks across the world is they find new ways of getting into trouble all the time. One of the things that banks can work on to not create problems is to be careful on the lending side.”