countries at such a phase in the cycle. the problem is that growth does not always take place as expected. the years of strong global growth before the global financial crisis were followed by a slowdown, which extended even to india, showing how much more integrated we had become with the world. strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down. moreover, a variety of governance problems coupled with the fear of investigation slowed down bureaucratic decision making in delhi, and permissions for infrastructure projects became hard to get. project cost overruns escalated for stalled projects and they became increasingly unable to service debt. i am not saying that there was no malfeasance – the country ’ s investigative agencies are looking into some cases such as those where undue influence was used in getting loans, or where actual fraud has been committed by diverting funds out of a company, either through over - invoicing imports sourced via a promoter - owned subsidiary abroad or exporting to related shell companies abroad and then claiming they defaulted. i am saying that, typically, there were factors other than malfeasance at play, and a number of genuine committed entrepreneurs are in trouble, as are banks that made reasonable business decisions given what they knew then. the sources of lending distress : poor monitoring and collection the truth is, even sensible lending will entail default. a banker who lends with the intent of never experiencing a default is probably over - conservative and will lend to too few projects, thus hurting growth. but sensible lending means careful assessment up front of project prospects, which i have argued may have been marred by irrational exuberance or excessive dependence on evaluations by others. deficiencies in evaluation can be somewhat compensated for by careful post - lending monitoring, including careful documentation and perfection of collateral, as well as ensuring assets backing promoter guarantees are registered and tracked. unfortunately, too many projects were left weakly monitored, even as costs increased. banks may have expected the lead bank to exercise adequate due diligence, but this did not always happen. moreover, as a project went into distress, private banks were sometimes more agile in securing their positions with additional collateral from the promoter, or getting repaid, even while public sector banks continued supporting projects with fresh loans. promoters astutely stopped infusing equity, and sometimes even stopped putting in effort, knowing the project was unlikely to repay given the debt overhang. the process for collection, despite laws like sarfaes

and to small enterprises. the more appropriate conclusion then is that public sector banks were shrinking exposure to infrastructure and industry risk right from early 2014 because of mounting distress on their past loans. private sector banks, many of which did not have these past exposures, were more willing to service the mounting demand from both their traditional borrowers, as well as some of those corporates denied by the public sector banks. given, however, that public sector banks are much bigger than private sector banks, private sector banks cannot substitute fully for the slowdown in public sector bank credit. we absolutely need to get public sector banks back into lending to industry and infrastructure, else credit and growth will suffer as the economy picks up. these charts refute another argument made by those who do not look at the evidence – that stress in the corporate world is because of high interest rates. interest rates set by private banks are usually equal or higher than rates set by public sector banks. yet their credit growth does not seem to have suffered. the logical conclusion therefore must be that it is not the level of interest rates that is the problem. instead, stress is because of the loans already in chart 2, the latest negative growth april number may be an aberration because of uday bonds being transferred from bank loan books to investments ). bis central bankers ’ speeches on psb balance sheets, and their unwillingness to lend more to those sectors to which they have high exposure. there are two sources of distressed loans – the fundamentals of the borrower not being good, and the ability of the lender to collect being weak. both are at work in the current distress. the sources of lending distress : bad fundamentals why have bad loans been made? a number of these loans were made in 2007 – 2008. economic growth was strong and the possibilities limitless. deposit growth in public sector banks was rapid, and a number of infrastructure projects such as power plants had been completed on time and within budget. it is at such times that banks make mistakes. they extrapolate past growth and performance to the future. so they are willing to accept higher leverage in projects, and less promoter equity. indeed, sometimes banks signed up to lend based on project reports by the promoter ’ s investment bank, without doing their own due diligence. one promoter told me about how he was pursued then by banks waving checkbooks, asking him to name the amount he wanted. this is the historic phenomenon of irrational exuberance, common across