Five point someone

Raghuram Rajans five pillars lay out the agenda for the RBI in the quarters to come.

Raghuram Rajans five pillars lay out the agenda for the RBI in the quarters to come.

The RBI governor,Raghuram Rajan,unveiled a five-point agenda at the second quarter monetary policy review,aimed at an overhaul of the banking sector. Though Rajans five pillars were overshadowed by his 25 basis point hike in the repo rate,they are important because they set the RBIs agenda for the next few quarters. The five points are to clarify and strengthen the monetary policy framework; to shore up the banking structure through the entry of new banks and more branches; to broaden and deepen financial markets; to expand the net of the formal banking sector; and lastly,to improve the systems capacity to deal with corporate distress. The Urjit Patel,Nachiket Mor and Bimal Jalan committees,which will be submitting their reports soon,will provide a roadmap for strengthening the monetary policy framework,encouraging financial inclusion and facilitating the entry of new banks,respectively.

One of the most important challenges ahead is to get the investment cycle moving again. The number of loans coming up for recasting before the corporate debt restructuring cell has been increasing dramatically. The amount of debt that many in India Inc have taken on is so large that their balance sheets dont allow them to either borrow more or to issue equity. Also,the high proportion of NPAs and distressed assets makes it difficult for banks to continue lending at the same pace as before. In this context,the RBIs fifth pillar to strengthen real and financial restructuring is important. It must revisit its provisioning norms in order to encourage sick assets to be sold and taken over,so that corporate balance sheets can be cleaned up.

Rajan has always emphasised the deepening of financial markets and the completion of missing markets the third pillar. By increasing liquidity through term repos at the short end and allowing banks to give partial credit enhancement for corporate bonds,he has encouraged the emergence of a corporate bond market. This is unambiguously a good thing. By allowing interest rate futures,important to help companies hedge risk,Rajan has taken a crucial step to deepen derivative markets in India. This is significant as it recognises that speculation isnt always bad.