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Steering banking system through demonetisation, NPA challenges, Urjit Patel has emerged stronger in two years

Madan Sabnavis
As this has not been done before, doing it now will definitely send a signal that all is not well with the government’s finances and will hence raise several questions on the running of the Budget.

The role of the Reserve Bank of India (RBI) governor has progressively become more challenging as the economic structure has become complex with a plethora of reforms being undertaken at the government as well as central bank level. Invariably there are pressures from all sides and working through these aspirations requires pragmatism.

Urjit Patel, the present RBI governor, has had a unique tenure compared to his predecessor. When Raghuram Rajan took over, the economy was in the midst of what could be called a balance of payments crisis where remedial measures had to be taken to bring the situation to normal. As a parting shot he had uncorked the Non-Performing Asset (NPA) champagne which then had to be managed by Patel. For Patel, the challenges have been from within where political, business and economic interest groups have had to be taken along.

Three major challenges have been faced by the RBI in the last three years which have been tackled with great character. The first was the demonetisation move of the government which had ignited a plethora of passions. To better appreciate the challenge of the RBI, it should be accepted that in a system different organs of the superstructure have to work with each other to ensure that policies work. This holds in organisations where individuals may not agree with the management, but yet work to achieve common goals.

The same thing holds for the government, where a decision taken at the higher level to go in for demonetisation was to be fulfilled by the central bank -- first in ensuring that it went to the logical conclusion by end-March 2017 and second to re-monetise the economy in a little over a years' time. And accomplishing these twin objectives was even more challenging given the constant criticism that was levelled on the availability of currency. The fact that this has been accomplished quite seamlessly despite the accompanying hiccups during the implementation phase is definitely a positive achievement for the central bank.

The second achievement has been in the area of monetary policy and the formation of the Monetary Policy Committee (MPC). This was one of the recommendations made earlier which was implemented in Patel's time. Having a fair blend of RBI officials and outside experts, the committee has done a remarkable job in the conduct of monetary policy with a great deal of transparency being pursued. This has set to rest the controversy that has been there in the past on decisions taken on interest rates.

Once a decision is taken by the Committee, it ceases to be one taken by the Governor alone. Even earlier there was a Technical Advisory Committee which gave their views and hence there was only a minor change in the decision-making process. But as the nominees were made by the government, the final outcome of each policy steered clear of controversy as the rules of the game were laid down clearly. Today nobody can say that the decision taken on rates is a unilateral one.

Third, the RBI had to manage the big 'can of worms' which had not just multiplied but degenerated in scope. This was the NPA problem which was a sort of parting shot by Rajan. The asset quality recognition process set in and while banks kept talking of revealing all every quarter, the time extensions were just too many. Even today one is not clear about whether all banks have recognized and provided for their earlier stock of assets.

The tough decision which the RBI has taken in this respect has been in terms of drawing up the framework for resolution of NPAs which was notified in February 2018. Delays of even a single day are to be classified under SMA mode and a non-resolution within 180 days would mean referral to the IBC-NCLT framework. More recently the power sector had asked for forbearance and the court has decided not to interfere and left it to the government to overrule the RBI dictate. With the government choosing not to come in the way of the RBI, the NPA resolution issue has just gotten stronger. This can probably be the biggest victory of the RBI under Patel's tenure. Companies will be more careful when they borrow money and use the same in a prudent manner.

While it does appear that the resolution of NPAs will be taken to the logical end by the RBI, the future course would be in the direction of making PSBs stronger and improving the standards of governance across all banks. The RBI will have to work along with the government to find a solution to the problem of capital funding of the public sector banks (PSBs). A collaborative effort is required as presently the weaker banks have been put under the umbrella of prompt corrective action (PCA) which evidently is not something which is durable. The options of privatisation (which may not be acceptable to the government on a genuine scale of lowering its holding to less than 51 percent) or mergers (which could mean just kicking the can again) have to be explored and implemented at least on an experimental basis.

On governance, the RBI has already started the process by advocating the removal of its nominee from the boards of PSBs and scrutinising processes of other private banks. Given that the government has also revealed its preference for staying away from the operations of banks, there are positive hopes here.

Patel has had to steer the banking system and monetary policy through these challenges which have not been an easy task, though should be fairly satisfying. He has also stayed away from any political controversies and restricted communication to central bank actions and policies. This professional approach has been accepted and appreciated by the market and players, which matters at the end of the day.

(The writer is Chief Economist, CARE Ratings)

 

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