Indian central bank Governor Raghuram Rajan said government-run banks were to blame for a slowdown in credit growth, not high interest rates.

Rajan, who announced on Saturday that he would step down in September, called for improved governance and more capital injections into state-run banks. It was his second speech this week defending his policies after he called on Monday for his successor to keep up his fight against inflation.

“To the question of what comes first, clean up or growth, I think the answer is unambiguously ‘Clean up!’" Rajan said in Bengaluru, according to a text of his remarks. “Indeed, this is the lesson from every other country that has faced financial stress. It is important, therefore, that the clean-up proceeds to its conclusion, without any resort to regulatory forbearance once again."

To read more on Rajan’s efforts to clean up the banking system, click here.

Rajan’s exit has spurred concerns that his successor may abandon his March 2017 deadline for banks to clean up more than $100 billion of stressed assets on their balance sheets. With bad loans at a 15-year high, the project is a crucial step toward reviving credit growth and bolstering India’s $2 trillion economy.

David Fuller's view

Surely Rajan’s programme of requiring the banking sector to be cleaned up through a combination of write-offs, mergers and closures before pursuing stronger GDP growth is correct.  The US economy benefitted from doing this following 2008/9, while the EU did not, resulting in a banking sector which is still relatively weak today.