It was not without reason that the Reserve Bank of India is called the bank of banks. Its policies and regulations have an indisputable impact on the country’s fiscal stability. When political priorities, populist compulsions or demands of cronyism pushed the government to divert from its often-proclaimed goal of economic stability, the RBI has felt compelled to intervene. Many times, it has suggested corrective measures. There have been times when the government of the day was at loggerheads with the RBI on matters related to the health of the banking industry.
During the pandemic, when the government was releasing package after package, people looked at the RBI for an understanding of the financial repercussions of the government’s actions. Since the surgical strike, better known as demonetisation, the RBI has kept a low profile. The central bank, mandated by the RBI Act 1934 to play the role of “monetary authority”, was gradually forced to take a backseat.
But all of a sudden, on November 20, it came into focus when the report of its internal working group was released. This report is a green signal for corporate houses to control the banking system. The recommendations of the working group would have a far-reaching impact on the financial stability of the country. The measures it contains would deepen the crisis faced by the economy, hence they warrant a threadbare discussion. It is heartening that the former RBI governor Raghuram Rajan and his deputy Viral Acharya initiated that essential exercise. Mincing no words on its retrograde nature, the two renowned economists called the report a “bombshell”.
It needs no emphasising that the ideas contained in the report originate not from within the RBI’s four walls. The working group was only parroting the policy of the government. Those who drafted the report might have been influenced by the happenings in all institutions of constitutional sanctity. That might be the reason for them to fall in tune with the government’s affinity to corporate houses. The crux of the report is to overhaul the licensing policies of private banks. Once the report is formally approved by the government, corporates would be entitled to float banks. Non-banking financial companies (NBFCs) would freely become full-fledged banks. It is like a gift offered by the government to their financial cronies and political cousins. The RBI report was only instrumental to it. How quickly and easily they could forget the instances of fraud and mismanagement in the banking sector with the involvement of well-known corporate houses.
On December 14, the All India Bank Employees Association released a list of 246 “big willful defaulters” who owe Rs 1.08 lakh crore to banks. It also notes that “in an application filed under the RTI Act, the RBI says that there are 1913 willful defaulters who together owe Rs 1.46 lakh crore to banks as on June 2020”.
The experience of bank failures across the world throws light on the nexus between politicians, corporates and the bank higher-ups. The losers in all such cases are the depositors and the workers. Governments have come forward with the panacea of haircuts and book adjustments. In all such haircuts, the willful defaulters benefitted a lot while the banks suffered. Any analysis on the crisis of the banking sector reveals the presence of a corporate hand. In this background, the RBI recommendations to spread red carpet before these very corporates to float regular banks would be suicidal. It is just like entrusting the key of the coffer to the thieves themselves. In their note, Rajan and Acharya say “the history of …connected lending is invariably disastrous… how can the bank make good loans when it is owned by the borrower? Even an independent committed regulator with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending… while the proposal is tempered with many caveats, it raises an important question: why now… Have we learned something that allows us to override all the prior cautions on allowing industrial houses into banking? We would argue no. Indeed, to the contrary, it is even more important today to stick to the tried and tested limits on corporate involvement in banking”.
These remarks by two economic stalwarts might be a matter of annoyance to those who control the RBI from the finance ministry. But at a time when the living standards of the common people are falling, the powers that be are keen to pander to corporate greed. They don’t care if such adventures would lead to the peril of the banking system. Let them be cautioned: Such cronyism and dependence on FDI is not the way to Atma Nirbhar Bharat.
The writer is a Rajya Sabha MP of the CPI