Guv: Easy start, bumpy ride
MUMBAI: Urjit Patel completes a year as the governor of the Reserve Bank of India (RBI) on Monday. It has been a period that witnessed some of the most tumultuous changes in monetary and banking policy, including the invalidation of high-value banknotes and RBI stepping in directly to deal with bad loan cases.
Along the way, Patel and RBI had to face questions on whether the central bank’s autonomy has been eroded, with their acquiescence to the demonetisation move being part of it.
Patel had a somewhat easy start. His predecessor, Raghuram Rajan, faced a potential currency crisis. But soon RBI found itself holding the short end of the stick after demonetisation with its role becoming a matter of public debate.
The central bank had to take most of the blame for the hardship faced by public. The exercise was an extraordinary event, which called for more communication from the central bank to the general public, and to bankers who had to face their customers’ anger, said people.
Even in other matters such as the new monetary policy committee’s structure, Patel should have communicated more, said people. “The Indian financial market has always been used to a personality-driven monetary policy. Hence, there is need for more communication, especially by the governor, on aspects of liquidity, inflation forecasting, etc.,” said a Mumbai-based economist who declined to be named.
But there are other views. Former deputy governor R Gandhi said that the choice to speak in public is the prerogative of every governor. “This is an individual characteristic and we should not read too much into it.”
To be sure, Patel has spoken on matters concerning monetary policy and price stability. He has been vocal about farm loan waivers, which according to him impact credit culture and entail inflationary pressure. He had called for better alignment of the administrated rate of small savings schemes for faster policy transmission, and pressed for stepped-up recapitalisation of public sector banks.
The increasingly independent views emerging in the monetary policy committee and its refusal to engage with the finance ministry is also settling the debate on RBI independence, some said.
Refusal of the invitation “demonstrates Patel’s independence in determining monetary policy and regard (for) stable price development as (RBI’s) primary goal”, said Hugo Erken, a senior economist at Rabobank’s economic research wing.
The war on bad loans took an unprecedented turn under Patel’s governorship. When he took over, the bulk of the recognition of non-performing assets across banks was completed. Resolution was the remaining piece and it was sluggish as bankers feared that their decision may attract scrutiny as the solution entailed them to sacrifice some interest dues.
The government, through an ordinance amended the Banking Regulation Act, empowered RBI to suggest to, and even compel, banks to invoke proceedings against defaulters using the Insolvency and Bankruptcy Code. RBI’s role in the resolution of stressed loans again led to a debate on potential conflict of interest as the central bank also regulates lenders.
Nonetheless, the Patel administration drew a list of 12 large defaulters and asked banks to initiate insolvency proceedings against them at National Company Law Tribunal.
RBI has drawn a second list, of at least 26 defaulters, where banks have been given a 13 December deadline to come up with a resolution plan.
“RBI has been moving fast and leaving no stone unturned on the resolution of bad loans. This shows that cleaning up bank balance sheets is one of the top priorities,” said a senior banker on condition of anonymity.