Infra push should not override financial stability, says Raghuram Rajan

Reserve Bank of India (RBI) Governor Raghuram Rajan said on Thursday that 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, Rajan said, the country 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 - attended by Prime Minister Narendra Modi and Finance Minister Arun Jaitley - come as the government says it wants US $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," the RBI Governor added.

Funding for infrastructure is expected to pose a challenge to the country, whose banks, especially state-run lenders, continue to struggle with bad loans.

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

In 2014, the apex 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.

(Reuters)