A month after the then Governor Urjit Patel exited abruptly from the Reserve Bank of India (RBI) in December 2018, the Central Bank came out with two big relaxations -- setting free five of the 11 banks from the RBI's stringent prompt correct action ( PCA) or weak bank framework and the allowing restructuring of MSME loans with total exposure of Rs 25 crore.
The 24th Governor Patel had resigned in December 2018, a year before his tenure was supposed to end. The differences with the government on a number of issues were the reason for his exit, although not blaming anyone, he cited personal reasons for leaving the central bank.
The PCA relaxation and MSME restructuring issue were among half a dozen issues on which the RBI board had lengthy discussions in October-November 2018. Patel's book 'Overdraft: Saving The Indian Saver,' throws some light on these issues though he stays away from narrating any blow-by-blow account.
Under Patel, the decision to relax the PCA framework for some weak banks was referred to the board for Financial Supervision. The RBI was not at all comfortable in relaxing the PCA guidelines without any capital infusion from the government.
Patel, who left in December 2018, writes that the PCA norms were relaxed to 'graduate' five loss-making banks out of the PCA in early 2019. "Recapitalisation of these PCA banks helped them meet the criterion on net NPAs. Hardly anyone disagreed that this was to facilitate higher credit growth," writes Patel who was handpicked by the BJP-led NDA government after former RBI Governor Raghuram Rajan completed his three-year tenure.
In addition, extension and augmentation of forbearance for MSME loans was granted at the same time. "At the upper end of this forbearance (loans of Rs 25 crore), businesses with annual turnover of up to several hundred crores are beneficiaries," writes Patel. "How does this square up with fairness in a country where the average per capita annual GDP is about Rs 1.5 lakh?"
In a meeting in November 2018, when Patel was in charge, the board had then directed RBI to consider a restructuring scheme for stressed MSMEs. In January 2019 when Patel left, the RBI had announced an MSME restructuring scheme for a year, which has been extended post-COVID for another year. The MSMEs have now got another credit line from banks by way of additional Rs 3 lakh crore working capital loan where the government has thrown a 100 per cent guarantee cover.
In his book, Patel hasn't given an inside account of the stormy board meetings in the second half of 2018 where some meetings lasted for over nine hours.
Patel has agreed on relaxing only one issue which was about Basel regulatory capital framework. The RBI under Patel had agreed for extending the requirement for banks to meet the capital conservation buffer of 0.63 per cent for a year. All the other issues were referred to either an independent committee (like surplus capital) or referred to RBI departments to decide.
In his book, Patel is also critical of Mudra loans where government has set targets in the past for banks to give collateral-free loans up to Rs 10 lakh. Currently, the NPAs in the Mudra loans are one of the highest, even reaching 20 per cent-plus level for some PSBs. "It is worrying that some of the recent initiatives by the principal owner, like the quick-disbursing Mudra credit scheme, have been more akin to transfers," writes Patel.
Patel has also commented on the government move to create few large PSBs. The entire exercise started with the merger between SBI associates and the parent bank. The Bank of Baroda became an anchor bank to merge two mid-sized PSBs with itself. The BOB merger was announced in September 2018 and Patel left in December. "Three GBs were merged, which, going by past experience, usually leads to erosion in value, over time, of the entity that takes over the weaker ones," writes Patel. The announcement of merging 10 PSBs into four came after Patel left the RBI.
"One highly problematic GB was taken over by the wholly government-owned LIC, possibly contrary to sound and widely accepted investment conventions, as also on grounds of contributing to systemic risk," writes Patel.
Patel has given some insights on the government's take on the setting up of a bad bank. Given the growing NPAs, the idea of a bad bank keeps coming up. Recently, the Indian Banks Association (IBA) suggested the government for setting up a bad loan resolution company.
Patel writes that there was a fair bit of discussion between the government and the RBI in 2015 and 2016 on the subject of 'bad bank'. "At the highest levels of policymaking the idea was not liked, mainly because borrowers and lenders would be off the hook, and it was in the nature of 'mother of all moral hazard' - an undesirable backdrop for the next lending cycle," he says.