CHANGE WITH CONTINUITY

All those who said that the economy would take a big hit should RBI Governor Raghuram Rajan be denied a second three-year term ought to think again. Indeed, a prominent economics writer predicted an overnight flight of foreign funds in case the Government was to deny Rajan a second term. No one, just no one is, indispensable. Yes, Rajan did a good job of containing inflation and stabilising the rupee. And, belatedly, he also asserted to ensure that the banks clean up their books. Almost all public sector banks are sinking under a mountain of non-performing assets. But if they are still sitting pretty, which they are, it is because that being State-owned they can always expect a bailout. That sure is bad banking. Rajan in the latter part of his stint did try to ensure that the lending banks follow professional norms in extending credit. Huge sums given to crony capitalists in the UPA decade have now turned into several lakhs of stressed assets. Rajan has forced the lending banks to take strict measures against the defaulters. Top-shot businessmen are now running scared, hiving of their assets, even selling them at huge discounts. Rajan’s successor D. Subba Rao did not superintend well the credit off-take. Nor did he insist on the banks to take strict measures to recover their monies. But now that Rajan is leaving Mint Street, and his able deputy, Urjit Patel, is set to take over, the task of injecting complete professionalism in the banking sector will have to be done by him on a priority basis. For far too long public sector banks have been treated as extensions of the party in power, with a succession of finance ministers and their minions informally getting the banks to advance huge sums in uncollateralised loans on unreliable documentation and without proper due diligence. Again, till the advent of the Modi Government appointments to the boards of various banks, including the central bank, were decided on extraneous grounds, with politicians treating these specialised directorships as another form of patronage for their supporters. Now a systematic process is being evolved to make all such appointments. Patel will have an opportunity to contribute to the fine-tuning of the process as well so that there is no abuse of the banking system for partisan ends. In other words, with the appointment of Patel at the helm in RBI, continuity is assured not just in the monetary policy but in further professionalising every facet of the banking sector. Just like Rajan, Patel too is a highlyregarded economist, with a string of academic achievements and a rich work experience in multilateral financial institutions. He is unlikely to yield on rates in order to oblige the corporatist class and/or the growth-mongers who often remain oblivious to the first priority of keeping the general price-line under control. Now that a new system tasks RBI governors to keep inflation within a given band of four percent, plus or minus two percent, there will be less scope for finance ministers to pressure them on reducing the bank rate. In part the huge red ink running through the balancesheets of various banks is on account of the low rate regime in the first half of the previous decade.

Besides, there will hardly be any scope for tension between Mint Street and North Block now that monetary policy is to be decided by a six-member Monetary Policy Committee. It will have two representatives of the Finance Ministry as well. The RBI Governor will chair the meetings of the MPC and expectedly will play a major role in its deliberation along with two representatives of the central bank. Though an academic debate on inflation versus growth might still persist, but the monetary policy set in a transparent manner by a representative MPC will carry much conviction. Meanwhile, Patel will have his task cut out to clean up the banking sector. In our view the biggest reform will come when banks are insulated against undue political interference, when a finance minister’s son does not dictate key appointments as also huge disbursals of loans. Patel is fortunate that he can rely on the full backing of the Government in professionalising the banking sector. Meanwhile, given that he likes to keep a low-profile, and does not go around dispensing gems of wisdom, it will keep him away from unnecessary misunderstandings and controversies. RBI governors should speak through their policies, not by playing celebrity or acquiring a rock star persona.