RBI Governor Patel can rescue India’s banks

RBI transferring Rs 3.5 lakh crore of its estimated surplus to the public sector banking system would immediately ensure a fresh impetus to bank lending.

This columnist had for long been a critic of RBI Governor Raghuram Rajan, although when the Chicago University don decided to switch gears and become active on the swelling tide of non-performing assets (NPAs) in the banking system, a suggestion was made that a second term should be considered. Rajan had already done damage through relentless boosting of interest rates and choking of liquidity, but such ultraconservatism has been the norm in RBI since the 1992 Narasimha Rao reforms. Before he had a go at tackling the (largely politically-induced) NPA menace that was slowly poisoning the banking system, out went Rajan and in came Urjit Patel, who continued with the policies of his predecessors, rather than seeking an innovative pathway out of the low growth (by the standards of India’s needs) trap that has afflicted the economy. The only reason why annual rates of growth of a country gifted with a superb phalanx of talent have remained below the 12%-15% potential is the continuing confluence of hyper-cautious fiscal and monetary policies. North Block, even during the “reformist” tenure of Finance Minister Manmohan Singh, insisted on high tax rates, while Mint Road sought to curb “excessive growth” (i.e. around 9% annually) through monetary tightening. An example of the harm high taxes are doing to revenue collection is the corporate tax rate. If this were reduced significantly, the huge flow of moneys abroad through creation of artificial costs and expenses (such as on royalties or headquarters contribution) would have reduced substantially, the way they are in the US, now that Donald Trump has cut corporate taxes sufficiently. It speaks for the distance from ground reality of those chosen by North Block to man the higher echelons of the RBI that a particular Deputy Governor has talked down the value of the rupee, thereby encouraging, rather than protecting the currency from predators. Of course, such language, although inadvertently, suits the interests of a cartel headed by a former Union Finance Minister to create uncertainty and mayhem such that vulture predators make huge gains at the expense of economic stability and the middle class. Even those responsible for the co-location scam in a major stock exchange continue to move markets with agendadriven analyses made from the cosy nests they occupy, courtesy North Block. RBI Governor Urjit Patel has not been a favourite of this columnist, after the RBI starved the economy of cash after the 8 November 2016 DeMo. However, a single measure by Governor Patel would stabilise the economy almost immediately, and place it on a double digit growth path within 18 months. This is to use Rs 3.5 lakh crore of RBI’s estimated surplus to recapitalise around ten of the better run Public Sector Banks (PSBs). The money could be handed over to North Block on condition that it be immediately transferred to these PSBs.

A battery of officials assured the people of India that the 8 November 2016 DeMo would rid the country of corruption, counterfeiting and terrorism. That it would generate around Rs 400,000 crore surplus (of unreturned cash) that could be used by the government. Soon after the measure was announced, printing presses in Thailand, Malaysia, Bangladesh, Malda in West Bengal, Pakistan and Dubai began turning out fake currency notes. These were the old Rs 1,000 and Rs 500 notes, which may have been handed over to bank branches in locations where checking whether a currency note was fake or real was problematic. Of course, in several branches there were personnel who accepted fake notes with abandon, and a flood of fake notes into the system is probably why the quantum of currency returned was almost equal to the 86% made worthless through the shock demonetization. Despite this setback,the RBI transferring Rs 3.5 lakh crore of its estimated surplus to the public sector banking system would immediately ensure a fresh impetus to bank lending, of course, this time with checks adequate to ensure that wellconnected scamsters do not once again use their influence and their affluence to be given loans that they have zero intention of repaying. Should Governor Patel and his Deputy Governors check the record, they will find that most central banks keep a far lower ratio of reserves than the RBI. Such a hoard is “meant for a rainy day”. Well, that rain is pouring these days, such that large chunks of the banking system are in a semi-comatose condition. Seeking to recapitalise them through tax crackdowns, which is what is being attempted by North Block, will damage business confidence and also the economy, while at the same time not generating anywhere near the funds needed for an adequate recapitalisation of even 10 public sector banks. Governor Patel could restore the health of the banking system in a manner that would redound entirely to the credit of the RBI, while at the same time halting the move from bank deposits to the capital market that has been going on since reports of a crisis in the banking system (several spread by the Vulture Insider Cartel led by a former minister) began to multiply. The response of the government to warnings of the cabal was to ask the IB to find out if such insider cabal activity exists, and knowing nothing of either the market or human vultures, the IB apparently reported back that no such gang exists, and that only “genuine market forces are operating”. Sleuths from the Police Academy seem to regard our markets as untainted by insider fraud and manipulation. That the former minister in a previous incarnation knew several of the police officers involved in the preparation of a clean chit to the Insider Vulture Cabal may not be coincidental.

Raghuram Rajan and his predecessors implemented monetary policies that slowed down growth, of course in tandem with those having a similar “textbook conservatism” mindset in North Block. During the period when the UPA was in power, Rajan failed to pay sufficient attention to the NPA balloon. It was only after the Narendra Modi government came that the then RBI Governor woke up to reality. Governor Patel is not the only official involved in the disaster that DeMo proved to be in practice. However, it is now within his reach to repair a considerable part of the damage to the economy caused by crony capitalists and their venal political and official friends by using Rs 3.5 lakh crore of central bank surpluses to recapitalise 10 Public Sector Banks, so that both balance sheets and loan portfolios race back to health before 31 March 2019.