Loans and liquidity will keep RBI Governor Shaktikanta Das busy

Loans and liquidity will keep RBI Governor Shaktikanta Das busy

The new governor said that the autonomy of the central bank would be preserved, along with constructive dialogue.

The tone has been set. As the new RBI Governor Shaktikanta Das entered the central bank's boardroom, the weather at the Mint Road headquarters had eased. Das has spoken about holding consultations with the government, indicating an end to confrontations, which marked the four and a half years of NDA during which Raghuram Rajan and then Urjit Patel were RBI governors.

At the December 14 meeting, the issue of accepting the board's supremacy appeared to have been resolved. Issues related to Prompt Corrective Action (PCA) and its impact on the finances and operations of 11 public sector banks under PCA were extensively discussed, along with ways to increase liquidity in the market. Before entering the boardroom, Das made it clear that he had accepted his appointment letter with a commitment to constructive dialogue with the government and other stakeholders.

The new governor said that the autonomy of the central bank would be preserved, along with constructive dialogue. The last two meetings of the RBI board had been stormy, leading to a national debate on the boundaries of the central bank and the government. The most recent confrontations are believed to have resulted in Urjit Patel resigning.

However, expecting a change overnight would be unfair. Officials at the Ministry of Finance said that the economy must expect some corrections. "For every matter, you don't have to go back to the board. Economic growth of the country is a joint agenda of the government and the regulator; we must achieve it together," a top official of the finance ministry said.

Das, who retired as Secretary of Department of Economic Affairs and was later appointed as a member of Finance Commission, is expected to be more benign towards the government's point of view and accommodative to its agenda. In the last year of the government's current tenure, when the general elections are less than 100 days away, a new dash of liquidity will pump up sentiment.

However, even with a new governor at the helm, it will not be easy for the central bank to change its official stand point, including its stance at the monetary policy committee, which has reworked the calibrated approach towards inflation to neutral. Before going to elections, when the inflation is structurally down, Das will be expected to convince the committee members to change their outlook and reduce interest rates. This will directly impact the mood of the middle-class, which PM Narendra Modi would want to please. Finance ministry officials have been seeking to cut rates for the last 3-4 meetings. This six-member committee, which takes decisions by majority, may see its composition change now, with the new governor as its head.

The December 14 meeting was focused on opening a liquidity window for NBFCs and for infrastructure funding. Das also spent Thursday meeting the heads of seven public sector banks to understand their grievances regarding the 'rigid' PCA and identification of non-performing assets (NPAs). Eleven out of 22 public sector banks are under PCA; they control more than 1/3rd of the debt. These banks face lending curbs, which, the government has argued, is squeezing liquidity and thereby impairing an economic recovery.

Public sector banks are facing challenges, as they are unable to open new branches and extend more debt. "Even if we have to rework many of our previous strategies that didn't work, there is no flexibility," a managing director of PSU bank had told Business Today. He explained that they had a few opportunities for discussions with RBI officials, but nothing came of it. Another banker told BT that they have asked for a review of a controversial February 12 circular, which impacted 34 power sector projects and their lenders. "This might have been a great idea in an ideal economy. But in India, the power sector is a highly regulated sector. It is unfair to send one of the components of the sector for liquidity, whereas fuel, transmission and in most of the cases, the consumer, is controlled by the government," the banker said.  

Later in the evening on December 14, Union Cabinet minister Piyush Goyal wrote a series of tweets echoing the PSUs' grudges and subtly pushed the government to back their cause.  He wrote: "Without any reference to the board of directors, suddenly on 1st April 2017, RBI drastically changed the Prompt Corrective Action framework. This is not there anywhere in the world. It was like changing the rules of the game midway into the match. This has not been debated enough." This was followed by another tweet: "Would you not want the Government to at least ask questions of the revised PCA framework - what promoted you to change the rules halfway into a game? Did you discuss it with anybody, is it comparable to international norms?"

The same evening, RSS backed the government. At a stakeholder consultation, their economic thinktank, Swadeshi Jagran Manch (SJM), backed easing out of the PCA, deferring the implementation of the BASEL-3 norms as well as the new accounting standards. Their national co-convenor Ashwani Mahajan said these three factors will create more requirement for the additional capital. He added that the RBI must rethink the regulatory framework for private banks as well. "None of us want Indian home grown banks (to) be allowed (to fall into) the hands of foreign players. SJM is also of the view that the maximum promoters' ownership cap should be re-examined. Along with the recent exceptions given to foreign funds to take majority shares of the banks," he said.

Meanwhile, Das has to push for an earlier resolution to the contentious issue of transfer of reserves. To study this issue, a sub-group under former RBI Deputy Governor, Rakesh Mohan, was constituted in the November 17 board meeting. Finance Ministry officials told BT that the reserves that RBI is sitting on are huge, even by international norms; the money needs to be pumped into the banking system.

They explained that with NPAs and even the insolvency and bankruptcy rules, banks were required to forgo their returns. Moreover, if they have to implement BASEL-3 norms and the new Indian Accounting Standards (IndAS) in the banking system, banks will require additional capital to maintain capital adequacy ratio.

Published on: Dec 17, 2018, 6:32 PM IST
Posted by: Jatin Kumar, Dec 17, 2018, 6:32 PM IST