Outgoing Reserve Bank of India Governor Raghuram Rajan spoke to Business Today Editor Prosenjit Datta and Deputy Editor Anand Adhikari on how he was positioning the central bank as a knowledge institution to manage the change in monetary policy framework, and banking and finance. Edited excerpts from an interview that was conducted months before his decision to leave RBI for academics:
On RBI as an institution
RBI is a very professional organisation. It has a reputation built up over 81 years of integrity and capability. It is a hierarchical organisation. So, the governor does set the tone, but it is not as if you do not have to do the usual job of persuading. If you do not listen to the concerns that people have, you are going to drive the whole organisation off the cliff very quickly. When I came in, there were already papers on differentiated banks and fresh licensing of universal banks. And the issue was to take it forward. There has been a big movement on the monetary policy framework driven by the Urjit Patel committee report, which moved us towards a framework that was more common across the world. Some say it was only for developed countries. That is not true. It is a framework that many developing countries or emerging markets have used. It puts some discipline on the monetary policy setting process, so that you have some clear objectives and try to deliver on them. We have historically resisted having those clear objectives. My sense was that the time had come where we could give up some flexibility for the larger purpose of bringing down inflation. And even within that framework, we will have enough flexibility to operate.
On risks in new niche banking models
The big risk in payments banks - the way they are structured - was really about operational risk. Does the person (bank representative) who receives money in a remote village, puts it in your account; and, then, is the money handed over to the government, treasury bills or the bank's deposit account? That process is something we were really worried about, because payments banks were not allowed to lend. We had to worrry about operational risks, customer service and customer grievances. That is one set of supervisory concerns we will have to deal with. For small finance banks, the focus is on small customers. So, there is no significant quantum difference in those banks from the universal banks that we regulate. In both cases, we regulate enough, but not over-regulate. We shouldn't smother their creative processes. That's why we licensed a variety of players for payments banks to see what actually emerges as an appropriate solution.
One place where we are finding difficulty is in the cyber space. We see a lot of engineers coming into the RBI, but cyber specialists are not as eager to devote (their time to RBI) as they prefer being in start-up ventures. So we are creating a cyber subsidiary, which will have policies that are more attuned to that kind of industry. There will have to be some sort of screening process, which is public and which is fair, but which will get the necessary skills into the RBI to do the kinds of activities like cyber supervision, checking banks' systems and security for the entire system against hackers, and stuff like that.
On dealing with distress
When a person or project gets into trouble, can we clean it up and put it back on track, or close it down, as the case may be, in a quick and efficient way? For a variety of reasons, our ways of dealing with distress have been very, very slow, murky and, to some extent, unfair. I think (it is necessary) to bring more transparency and speed into the process to ensure the asset does not deteriorate. I think that will be a big change. We have taken some steps, but the government is probably taking the bigger steps by bringing the bankruptcy code in. If that happens, we will have a proper system for redressal. One of the biggest aspects of a free enterprise is to fail in a relatively efficient way so that it does not impose significant costs. You have to fail and be able to stand up, and walk after that. We need our businesses to be able to fail effectively. That is a work in progress.
On global best practices that we could borrow to appoint governors
In a modern economy, the job of a governor requires somebody with a training in economics, but if it is not so, at least, a very good understanding of economics, finance and banking. Someone like Y.V. Reddy had that capacity. Have a sense of the whole thing. If you are a macro economist, but don't understand finance and banking, you could be out of your depth very soon on the regulatory front. So, we need people with those kinds of skills and, to have people with those kinds of skills, we have to start grooming them relatively young. You could always pick them from outside. One of the difficulties India has, is the fact that not too many people went for further degrees in economics in the 1990s and 2000s. There were some of us who went in the 1980s. But when the economy liberalised then people didnt really think of going out. They went to consultancy. They went to other careers, such as that of an anchor, a journalist. Now, we are trying to help some in-house (talent) grow by sending them to training - PhDs, Masters to appropriate schools. But it is a long-drawn process. I think, the short answer is to attract a lot more people with more advanced degrees and send them to get experience at various places. In the '80s, we attracted a lot of people back from the IMF and World Bank - a large pool of 10 to 15, including Montek Singh, Rakesh Mohan, Arvind Virmani, Shankar Acharya. So, there was a choice - you could appoint CEA, deputy governor, etc. We need to get those kinds of people - not just for central banking, but for all other areas - because everything is becoming increasingly specialised. So, we need to groom.
On positioning the RBI as a knowledge institution
We are making important changes to the whole human resources process - human resource management and development. The idea is to break up management from development. Management is more about day to day (operations), while development is to enhance the quality of human resources. They feed into each other. On the management side, one of the issues was that our evaluation process was somewhat flat. This is true of many public sector institutions - everybody is evaluated very highly. Rarely a person gets a bad evaluation. This renders the evaluation process uninformative. So, we have to make it more informative, because in an environment where everybody is rated similarly, you have a variety of unhappy people - people who are really good, say there are no returns for being really good; people who are really bad, do not ever get to know what their deficiencies are. The point is not to punish, but to improve them. So long as they don't know their deficiencies, how will they improve? So, our attempt is to get a little more differentiation in the performance evaluation - find ways to identify the really good and take them to places so that the bank benefits from their capabilities. In the process, we can also improve the capabilities of those who are not performing well. Both require training - the person who is doing well will be even better, more specialised in what he or she is doing, to serve the bank well, and people who are not up to the mark will have the opportunity to bolster their skills or to find a new place where they may be happier. We are strengthening our existing institution for advanced financial research and learning. We are also thinking of an RBI College or institute, which will provide advanced training in issues that central bankers need to know, including capital management, risk management. We really need good human capital in the economy. We would like to keep the best and hope to retain everybody we have.
On RBI hierarchy coming in the way of research
We do have a hierarchy. I would like to see more of young researchers have the freedom to do what they want. Young people don't like being told what to do. A lot of good research depends on thinking of something out of the box - things that your bosses cannot think about - and producing some research that truly astounds, and may change the course of a policy. I would like to see more of that happening. We need to give the people more freedom from day-to-day drudgery. We are also sending them for more learning opportunities elsewhere. CAFRAL (Centre for Advanced Financial Research and Learning) as a research outfit is also being strengthened and ties between CAFRAL and the RBI researchers are also increasing.
On attracting talent
As a public sector institution, we are there with the best. The incoming cadre is as bright as they get. Yes, we lose a few to the IAS, but I am hopeful that we at least beat the elite services (when it comes to talent acquisition).