RBI Governor - Is he the only "Yes boss"?
Extension to Shri Sakthikanta Das - Reward for being compliant?
To my
article in the blog
https://viswoice.blogspot.com/2021/10/3-year-extension-to-rbi-governor.html,
I received some interesting feedbacks.
Main Contentions were: a) the present RBI Governor, more often, plays the role of 'yes boss' b) RBI's instiutional independence has been compromised during his tenure c) Professional concerns are not expressed openly and d) Extensio may be the reward for transferring Rs.1.70 lac cr. surplus to the boss (government) in 2019.
1. Whether
all actions of the present Governor independent?
During
the present Governor's period, MPC (Monetary Policy Committee) reduced repo
rates by 250 basis points (135 points prior to COVID and 115 basis points with
the onset of COVID). Major regulatory and support measures initiated during the
period include (i) widening the gap between repo and reverse repo (65 bps as
against normal 25 bps) (ii) intervene in the g-sec market constantly to enable
the government resort to huge borrowings at historically cheap rates (iii) make
lending available to financial institutions at repo rate (4%) for on lending to
targeted sectors. While the actions are generally intended to keep the
borrowing at cheaper rates to revive the economy, continuing the repo rate
unmindful of 'inflation', influencing the market to keep the yield curve 'artificially
low' for government borrowings and making repo rate irrelevant for money
and bond markets, which rallied around reverse repo rate are debatable.
But one should admit that adequate statistics, forecasts and reasons back these
decisions, bringing a sense of 'independence' to the regulator’s line of
thinking.
However the same cannot be said about distribution of surplus to the government effected in the last three years, particularly in 2019 (Rs.1.76 lac cr.) and 2021 (Rs.0.99 lac cr.). Though the surplus transfer is based on the recommendations of Dr.Bimal Jalan Committee (on Economic Capital Framework) and is as per decision taken by RBI Central Board in the respective years, there is an element of uncertainty in having complied with one recommendation of the above committee, which is as under:
*Available
Realized equity
The uncertainty is because the ARE maintained after transfer of the entire surplus to the government was only 5.5% as against 6.5%, if the above recommendation is valid.@
2. Were his predecessors independent?
His
predecessors, possibly with the exception of Dr. Urjit R. Patel, appeared to
have played along with the Government at one time or the other. Most of such
actions of the earlier incumbents also relate to 'bring down repo rates in line
with finance ministry line of thinking' and help the government raise its
borrowings at affordable rates through market interventions. This is
understandable to an extent. But it will be very difficult to justify
the striking 'toe the line' behaviour from 2008-2016 in designing
various debt restructuring schemes for corporates, which enabled easy
restructuring, with retention of quality of assets as 'standard' and virtually
turning a 'blind eye' to the ground reality of almost all commercial banks,
picking up the loop holes of all the schemes, to 'evergreen' their advances. To
avoid the global crisis in 2008 engulfing India, Corporate Debt Restructuring
Scheme (CDR) was modified to permit banks to retain restructured advances as
'standard assets' (thereby allowing banks to account for interest accruals
without actual realisation and make only marginal provisions applicable for
standard assets). Even when it became clear in 2011 that most of the CDR
schemes implemented were actually done only to postpone the 'inevitable' for a
future date, RBI continued the regulatory forbearance without any valid
reasons. The scheme continued till 31st March 2015, in one form or the other.
RBI was on record to continue the regulatory forbearance upto March 2015. The
master circular issued in July 2013, stated thus:
"Working Group (WG) recommended that the RBI may do away with the regulatory forbearance regarding asset classification on restructuring of loans and advances in line with the practice followed in several jurisdictions. However, in view of the current domestic macroeconomic situation as also global situation, this measure could be considered say, after a period of two years. RBI has decided to accept the above recommendation and give effect to this from April 1, 2015. Accordingly, the extant asset classification benefits available on restructuring on fulfilling certain conditions will be withdrawn for all restructurings effective from April 1, 2015."
The Governors in the above period included Dr.Y.V.Reddy (2003-08), Dr. D. Subba Rao (Sep 2008- Sep 2013), Dr. Raghuram Rajan (Sep 2013-Sep 2016). There is a perception that Dr. Raghuram Rajan was the most independent Governor of RBI till date. Surprisingly during his period only the CDR scheme adorned 'different shirts' to continue the 'standard asset' definition for restructured assets till end of 2016. 5/25 scheme (flexible structuring of enabling longer repayment periods) was introduced in July 2014. Strategic Debt Restructuring (SDR) implemented in June 2015 and S4A (Scheme for sustainable structuring of stressed assets) came into being in June 2016. Asset Quality Review was undertaken by RBI, when it became evident that none of the above schemes can no longer support the banks to retain their assets in 'standard' form.
So the question is whether the 'regulatory forbearance for quality of assets' for a period of 8 years was continued by RBI on its own or to satisfy the 'boss' (the government). I leave it to the readers to make their judgment.
3. Certain Actions taken during may haunt in the near future: As I said in my earlier blog, success of moratorium and restructuring measures to rescue borrowers stressed on account of COVID impact depends on several factors like revival of economy, containing new COVID cases, commodity supply side shocks etc. The future may witness unprecedented stress in loan assets especially on retail & MSME. The interest rate, suppressed for long, may start its upward journey rapidly. Again pumping in liquidity, when the system was flush with funds, may be analysed and wisdom arising out of experience may be presented as views of experts in hindsight.
4. Still Shri Sakthikanta Das deserves the extension on the following grounds:
- Ensuring
'Financial Calmness' during the COVID period by bringing out monetary
policy and regulatory measures aimed at growth to sustain the economy,
battered by COVID epidemic.
- In
the last two MPC meetings, the governor indicated his desire that the
government should play its role in addressing the supply chain shocks to
the economy, particularly the effects of steep hike in petrol and diesel
prices. His persuasive skills appears to have brought in dividends as the
central government has reduced the cess on petrol and diesel prices. (Of
course, bringing them under GST might be the permanent solution)
- Difference
of opinion between the regulator and the government would have been the
most undesirable event in these trying circumstances. It may be two to
three years for the Indian Economy to return to normalcy. And continuing
Shri Das at the helm of affairs in RBI helps to face the post COVID crisis
unitedly.
Regards
V.Viswanathan
6th
November 2021.
@RBI maintained ARE at the lower bound of the requirement (5.5%) for the last three years, as per details given below: (Rs. in cr.)
|
Year |
Total Assets |
Upper bound (6.5% of total
assets |
Lower bound (5.5% of total
assets |
ARE*maintained By RBI |
|
2018-19 |
4102905 |
266689 |
225660 |
225724 |
|
2019-20 |
5334793 |
346761 |
293413 |
293413 |
|
2020-21 |
5707669 |
370998 |
313921 |
313921 |
* ARE = Equity+Reserve Fund+CF+ADF
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