The RBI is fighting fit at 90

When the central bank demonstrates performance, when it takes on board the concerns of all stakeholders, including the government, the political authority is more than happy to let it get on with its job

At 90, the Reserve Bank of India (RBI) shows not just poise but an alertness and agility unusual at that age. The praise it has received on the occasion from the Prime Minister and the finance minister is well deserved

The RBI has had a stellar record throughout the economic liberalisation process. Yet, the record of the past four or five years stands out because of the enormity of the challenges the RBI faced in a relatively short period.

The Covid-19 crisis hit the Indian economy in 2020, when the banking system was still in deep trouble with gross non-performing assets (NPAS) at 8.5 per cent of loans in 2019-20. The Ukraine conflict, which commenced in February 2022, created huge uncertainties in the global economy. Global growth decelerated to its lowest level in two decades.

In this extremely stressful period, the RBI acquitted itself creditably in all the critical areas: Monetary policy, foreign exchange management, and financial stability. It is the management of financial stability that is, perhaps, the most remarkable achievement. Nobody could have imagined at the onset of the pandemic in 2020 that gross NPAS as a proportion of loans could fall to as low as 3.2 per cent in about three and a half years. Many of the policies that have contributed towards financial stability have evolved over time; others arose in response to the pandemic. It is worth looking at both sets of policies.

Among the policies that have evolved over time, there is, first, the unified approach to regulation and supervision. Regulation and supervision are housed in the same entity. The RBI in recent years moved towards unified regulation of banks, non-banking financial companies (NBFCS), and urban cooperative banks (UCBS). Both these enable the regulator to better understand the inter-connectedness of these players and quickly identify weak spots.

Secondly, the RBI has eschewed “light touch” regulation. It does not believe that risk management can be left entirely to the boards and management of banks. It has not hesitated to make detailed prescriptions where necessary, for example, the Large Exposure Framework for banks.

Thirdly, the RBI has chosen to stay ahead of the regulatory curve on bank capital. Whereas the Basel norm is for a minimum capital of 8 per cent, the RBI has specified a requirement of 9 per cent. This anticipated the post-global Financial Crisis (GFC) wisdom that more capital in banking is better than less.

Fourthly, the RBI has tightened the regulation of NBFCS. Its position is that large, systemically important NBFCS must convert into banks and bring themselves within the ambit of the stricter regulation that applies to banks.

Fifthly, the RBI, unlike many central banks, has long followed a multiple indicators approach. It sees its remit as covering not just price stability but economic growth, financial stability, and financial inclusion. These indicators are mutually reinforcing. Focusing on all indicators helps achieve better outcomes on each one of them.

Sixthly, there is the framework for private and foreign ownership in banks whereby the limits on a single entity’s ownership in Indian banks are defined. There is also the policy for foreign banks, under which they can expect the same treatment as domestic banks provided they come in through the subsidiary route.

Then, we have the RBI’S many creative responses to the pandemic. Three deserve special mention.

The first is the moratorium of six months on loan repayment. Analysts thought almost everybody would jump in to take the facility. They were wrong: The moratorium was taken for only 40 per cent of the loans outstanding. Those who did not have liquidity problems saw no advantage in not paying their loans on time.

Secondly, there was the scheme for restructuring corporate and personal loans. Analysts warned as much as 5 per cent of outstanding loans would be restructured. Half of that, they said, would go bad later, adding NPAS of 2.5 per cent of loans to an already distressed sector.

Nothing of the sort happened. On average, only 1.5 per cent of all loans were restructured. A mere 0.2 per cent of corporate loans were restructured. That is because the conditions to qualify for restructuring as well as the monitoring plans for corporate restructuring were stringent. They were intended to filter out bogus cases and help only the genuine ones. As mentioned earlier, NPA levels have declined, not risen.

Then, there was the Emergency Credit Line Guarantee Scheme (ECLGS) announced by the government, in consultation with the RBI, in May 2020. Micro, small, and medium enterprises (MSMES) facing economic distress were given additional funding of up to ~3 trillion in the form of a fully guaranteed emergency credit line (GECL). Naysayers saw the ECLGS scheme as another “loan mela” that would again cause NPAS to rise in the banking system. It turns out that NPAS in the ECLGS scheme are 5 per cent of the total amount disbursed. NPAS in MSMES in general were 6.8 per cent of loans in March 2023. Over the years, NPAS in the MSME sector have been more of the order of 9 per cent.

“Regulatory forbearance” is a dirty word for many economists. It is seen as a means of “kicking the can down the road”, deferring problems to a future date. The RBI has proved them wrong. It has shown that regulatory forbearance, if well designed and executed, can generate positive outcomes.

The turnaround in banking has had an expected outcome. Talk of privatising public-sector banks (PSBS), which had gained momentum at the height of the banking crisis, has subsided. The improvement in financials of these banks is not the only reason. No government would like to privatise PSBS in a way that compromises the framework for private and foreign ownership that has been crafted to ensure stability in Indian banking.

RBI Governor Shaktikanta Das assumed office following the controversial exits of two successive governors. In both the domestic and foreign media, there were loud laments about the possible erosion of autonomy at India’s central bank. Mr Das has shown that it is possible for the RBI to exercise the necessary autonomy and achieve a high degree of credibility worldwide without getting into a confrontation with the political authority.

There’s an important lesson here. Autonomy is not something the central bank can expect to be given on a platter. When the central bank demonstrates performance, when it takes on board the concerns of all stakeholders, including the government, the political authority is more than happy to let it get on with its job.

FINGER ON THE PULSE

T T RAM MOHAN