Mint ST - - LONG STORY -

ad­viser, is con­sti­tu­tion­ally im­proper, since the RBI’S money should right­fully go to the con­sol­i­dated fund.

Prob­a­bly the wily for­mer gover­nor is smelling that the gov­ern­ment may in­deed take re­course to this plan, con­sid­er­ing that there is no men­tion of pro­vid­ing cap­i­tal to banks in next year’s bud­get.

The se­cond is­sue Reddy points to is the ten­dency of gov­ern­ments to push their agenda on the bank­ing sys­tem—a saga that be­gan with the na­tion­al­iza­tion of banks in 1969.

Clearly, we haven’t re­formed much since that dele­te­ri­ous move. The cur­rent gov­ern­ment has ordered an SME pack­age which, good prin­ci­ples re­quire, be pro­vided from the gov­ern­ment’s bud­getary re­sources.

But forc­ing the RBI to de­sign a pack­age that is man­dated via the banks, is to the dis­ad­van­tage of banks and the RBI. What moral author­ity will the RBI have to ques­tion the banks if those loans go bad, he asked.

An al­lied is­sue Reddy talked about was the gov­ern­ment’s arm-twist­ing of the RBI to re­lax the prompt cor­rec­tive ac­tion rules. If the RBI is the bank­ing reg­u­la­tor, it ought to be al­lowed to de­ter­mine which banks ought to be curbed from what kind of lend­ing.

The gov­ern­ment’s strong arm­ing weak­ens the RBIS reg­u­la­tory rigour. Again, who is to blame if these banks ratchet up more bad loans?

Reddy also ad­dresses the fre­quently ex­pressed cry that the RBI ought to ar­range for liq­uid­ity for the non­bank­ing fi­nan­cial in­sti­tu­tions (NBFCS) in the on­go­ing debt mar­ket prob­lem.

As Reddy points out, the de­fault on pay­ment by the In­fra­struc­ture Leas­ing and Fi­nan­cial Ser­vices (IL&FS) was not a liq­uid­ity is­sue.

It was an as­set qual­ity prob­lem. And now, as more ag­gres­sively-run NBFCS and mu­tual funds come out of the wood­work, it is in­creas­ingly clear that ask­ing the RBI to pro­vide a line of credit to NBFCS is like ask­ing the cen­tral bank to ev­er­green bad loans run up by ques­tion­able NBFCS and MFS to make quick prof­its, or worse, just siphon off the money.

Ul­ti­mately, what Reddy is de­fend­ing is the RBI’S right to say “no” when the in­sti­tu­tion is asked to take dan­ger­ous steps by an all pow­er­ful sovereign, whose eye is on the next elec­tion.

He is de­fend­ing RBI’S abil­ity to talk truth to power. Ev­ery well-mean­ing cit­i­zen needs to hear his plea. Reddy ends his speech by quot­ing the omi­nous words of the first In­dian RBI gover­nor, C.D. Desh­mukh: “No coun­try can have bet­ter pub­lic in­sti­tu­tions than it de­serves.”

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