Raghuram Rajan: Infrastructure Funding Should Not Come At Cost Of Financial Stability

02/04/2015 3:36 PM IST | Updated 15/07/2016 8:25 AM IST
Hindustan Times via Getty Images
NEW DELHI, INDIA - DECEMBER 12: RBI governor Dr Raghuram Rajan speaks during the Bharat Ram Memorial Seminar at FICCI Federation House on December 12, 2014 in New Delhi, India. Rajan said when India pushes manufacturing exports, it will have China to contend with and an export-led growth will not be as easy as it was for the Asian economies who took that path before India. He also said that India should also focus on domestic demand and create a unified market with a view to reduce transactions cost. (Photo by Raj K Raj/Hindustan Times via Getty Images)

MUMBAI — The Reserve Bank of India (RBI) chief said on Thursday the country's push to build infrastructure should not come at the expense of financial stability, adding banks already had too much exposure to the sector.

Instead, Governor Raghuram Rajan said, India needed to find new sources of funding for infrastructure so that debt levels remained "moderate".

The comments, at a financial event organised by the RBI that was attended by Prime Minister Narendra Modi, come as the government says it wants $1 trillion invested in infrastructure in the five years to 2017, with half of the funding coming from private companies.

"The nation has enormous financing needs in infrastructure, and far too many of our banks already have too much exposure," Rajan said.

"Big corporate infrastructure players have also taken too much debt. The required national push to finance infrastructure should not override financial stability, which is key to national security."

Funding for infrastructure is expected to pose a challenge to India, whose banks, especially state-owned lenders, continue to struggle with non-performing loans.

The gross bad loans ratio at banks could rise as high as 5.7 percent by March 2016 from 4.5 percent last December, rating agency ICRA estimates.

Last year the central bank launched infrastructure bonds, allowing banks to raise debt and use the proceeds to help fund the government's plan to provide affordable housing for all by 2022.

But issuance has been slower than expected due to low trading volumes in secondary markets.

Still, the government is pushing ahead with its ambitious infrastructure initiatives, which it sees as vital for economic growth. Finance Minister Arun Jaitley unveiled a budget in February that promised higher investment in the country's decrepit roads and railways.

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