ON December 12, when the new Reserve Bank Governor Shaktikanta Das spoke to the media at the Mint Road headquarters of the central bank on his first day in office, he dropped enough hints about handling some of the contentious issues before the central bank, which had progressively led to the exit of his predecessor, Urjit Patel.
“Stakeholder consultations have to go on. There have to be free, fair and frank discussions between the government and the RBI. The government is not just a stakeholder but manages major policy decisions…” Das made it loud and clear. If the resignation of Urjit Patel on December 10 following intense government pressure on the central bank on various issues related to the financial sector marked the low point of economic management in 2018, the new year could be interesting to and critical in as far as how both the RBI under the new Governor and the government tackle many issues.
While central bank officials, led by Patel and Deputy Governor Viral Acharya, made it clear that increased government influence on the central bank could undermine the RBI’s autonomy, ties between the two never took a turn for the worse until 2018 – as the government started pushing for a greater role for the board.
Das, the new Governor, had vast experience in the government and he also served as the Economic Affairs Secretary directly dealing with the RBI on many issues including demonetisation.
He would be clued in on what North Block wants. That’s a time when, as a former Governor said, “in recent years, the Government of India is emphasising more of accountability and less of autonomy.”
The major issues are yet to be resolved. Higher bad loan recognition has led to large credit costs for public sector bank, with weak capitalisation adding to their woes. While capital constraints have held back lending, 11 state run banks have been put under the RBI’s prompt corrective action (PCA) framework, which allows the central bank to directly restrict their lending.
The government claims this has choked credit flow to small and medium units. The RBI then agreed to work out a loan restructuring scheme for SMEs for a loan exposure of up to Rs 25 crore in line with the advice of the board.
However, it’s yet to officially announce the scheme and the guidelines. Now that the government had recently announced a Rs 85,000 crore bank recapitalisation programme, bankers are expecting the RBI to relax the curbs on some of the PSU banks which are under the PCA framework.
Problems in the non-bank financial sector following the recent default of Infrastructure Leasing & Financial Services (IL&FS) have further reduced credit availability, especially for NBFCs.
The RBI says liquidity pressures in the NBFC sector have eased. However, the government has not officially reacted to the contention of the RBI about the easing of liquidity pressures in the NBFC sector.
The RBI board, at its Central Board meeting on December 15, decided to take forward the issue of governance changes in the RBI.
“The board deliberated on the governance framework of the Reserve Bank and it was decided that the matter required further examination,” the RBI said after the board meeting on Friday.
However, sources indicate that RBI officers may not be enthusiastic about governance reforms in the central bank.
The government which had sought a discussion on governance in the RBI at the previous board meeting on November 19, is looking for a consultative process in decision making in the RBI board in a bid to align the overall economic policy framework given the conflict with the central bank over many issues
Aimed at empowering the Central Board, the Government has proposed various sub-committees within the central board to look into various issues related to banking and financial sector.
Urjit Patel had stoutly opposed any changes in the governance structure and economic policy framework, another bone of contention, that would have given more access for the government to RBI’s surplus reserves of Rs 9.43 lakh crore.
Currently, the Central Board has an advisory role while crucial decisions are taken by RBI officials.
Fitch Ratings says that most state banks are in a poor position to ramp up lending, with their common equity Tier 1 ratios well below the 7.375 per cent that will apply from April 201 2019 under Basel III implementation. Some banks are also likely to continue reporting losses, further adding to capitalisation challenges. With the government announcing recapitalisation, the Board for Financial Supervision or BFS is in the process of reviewing the PCA framework. The last meeting of BFS had asked for input from RBI officials to arrive at a suitable decision. This is expected to lead to a few more of the 11 PSU banks which have been placed under this framework being released from that which could help boost lending.
On Wedneseday, the RBI and the Centre pushed for resolution of the contentious issue of the RBI’s economic capital framework and transferring a higher surplus to the latter by setting up an expert committee headed by former Governor Bimal Jalan.
The Committee on Economic Capital Framework, announced two weeks after Shaktikanta Das took over as the new Governor in place of Urjit Patel, would propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required. It would also consider treatment of surplus reserves, created out of realised gains, if determined to be held, the central bank said in a statement.
Former Governor Y V Reddy, who was RBI Governor from 2003 to 2008, had once said, “history shows that independence or autonomy of a central bank is not like a law of physics.”
It is to ensure that people have trust and confidence in the institution that issues (promissory notes) currency or creates money with no collateral, by making the institutional apolitical, Reddy said in a speech.
The arrival of Das at the RBI’s Mint Road headquarters signals that the central bank won’t rock the boat. As he indicated on the first day, the central bank is unlikely to stand in the way of the government’s plans.
Das will have to do some tight-rope walking; he can’t be seen compromising the autonomy of the central bank as well as opposing all the government proposals.
The major complaint about Urjit Patel was that he remained incommunicado and refused to meet and discuss issues with major stakeholders.
Ties between RBI, govt turned worse in 201
- While central bank officials, led by then Governor Urjit Patel and Deputy Governor Viral Acharya, made it clear that increased government influence on the central bank could undermine the RBI’s autonomy, ties between the two never took a turn for the worse until 2018 – as the government started pushing for a greater role for the board
- Shaktikanta Das, the new Governor, had vast experience in the government and he also served as the Economic Affairs Secretary directly dealing with the Reserve Bank on many issues including demonetisation
- On Wedneseday, an expert committee headed by former Governor Bimal Jalan was set up to resolve issues of the economic capital framework