The RBI’s independence must be protected

There is merit in the argument that the Reserve Bank of India is not a free bird. An elected political leadership that is overbearing, even wayward, stands superior to a set of experts, including the highly accomplished economists who run the central bank. We therefore have Section 7 of the RBI Act, which empowers the government to intervene and ask the RBI governor to carry out its wishes, should such a situation arise. But never before has this provision been used. So, why has the government felt compelled to bring it up now?

Three aspects of the circumstances make this question pertinent and urgent. First, it is barely two years since the government brought in its chosen nominee, Urjit Patel, as the governor of the RBI. This appointment came after the unseemly manner in which his predecessor, Raghuram Rajan, left office. Yet, relations between the government and the RBI have gone downhill rather quickly. This is despite the fact that Patel has faced criticism for toeing the government line in matters relating to demonetisation. Second, this government has not stood up well to scrutiny in its handling of institutions and the integrity with which they ought to function. The case of the CBI illustrates just how deep the rot is and how entangled it is with a partisan political agenda. Why would the government open another front, unless this is seen as so important to its agenda, whatever that be? Third, what is at stake in the dispute between the government and the RBI is nothing less than the economic security of the nation. We are in the midst of a ballooning crisis in our banking sector, with Non-Performing Assets (NPA) now of the order of Rs 10 lakh crore and rising. The current ‘Govt vs RBI’ dispute therefore goes to the heart of larger questions over the banking system and the nation’s financial stability.  

Put simply, can banks with high NPAs (and other red flags) be allowed to go about their activities and grow their loan books without a strict set of restrictions, stricter oversight and the prospect of more regulatory action if they do not first fix the rot? This is what the Prompt Corrective Action, or PCA, is all about. It specifies a strict diet for a patient who is seriously ill. This diet includes stronger oversight, restrictions on expansion of credit, bank branches, staff, overseas operations and the like. Eleven public sector banks and one private bank (Dhanalakshmi Bank) are under the PCA framework now. The PCA-flagged PSU banks have a total Gross NPA of nearly 3.47 lakh crore as of June 30, 2018, and Net NPA of nearly Rs 1.7 lakh crore – mind boggling numbers for our banks. Last Monday, India’s largest bank, the State Bank of India, announced its quarterly results. SBI, which is not under the PCA, reported that its Gross NPA and Net NPA ratios improved quarter-on-quarter, but we are still talking Rs 2.05 lakh crore as on September 18, 2018.

How does the nation come out of this trap? The February 12, 2018, circular of the RBI gives banks 180 days to resolve an account in default, failing which it goes straight to the bankruptcy process under the recently established Insolvency & Bankruptcy Code, or IBC. The idea of continually restructuring a loan and the larger game of evergreening of loans can end once and for all with the IBC in place. The circular also mandates weekly reporting of defaulting borrower entities (exposure of Rs 5 crore and above), and a monthly reporting of all those who miss their payment schedules even by a single day. This strict 180-day time limit for referring the case to IBC is what the government and some power companies are demanding the RBI should relax.

On top of this is the dispute that appears to overwhelm all others – the government’s reported insistence that the RBI dip into its reserves to give it Rs 3.6 lakh crore, a move criticised and condemned by many central bankers.

The full implications of this dangerous game, never before played and one that is at risk of being executed using the ‘Brahmastra’ of Section 7 of the RBI Act, are not yet understood but it is generally agreed that the fallout cannot be good. Further, the government wants a more liberal approach to offering loans at a time it believes there is a liquidity crunch in the market. The demands are outrageous and follow in the footsteps of the demonetisation disaster. And it can get worse as elections near.

Governments want expansion, spending and the upbeat signals that come with growth; the RBI wants to look at the longer-term horizon and ask questions on how the spends will be financed and the implications of spending when revenues are not growing.  Fiscal profligacy is the calling card of governments. The call for fiscal rectitude bears the signature of the RBI. A sensible political leadership may push the RBI given its political need but it also must know when to stop. It cannot demoralise, demonise and break the very institutions that have over the years stood as pillars of sound advice in the interest of long-term sustainable growth and financial stability.  Supporting and strengthening the RBI’s capacity to say “no” to the government is to strengthen the nation; beating it down is not only an assault on the RBI but also on the nation.  Worse, when it comes in the case of NPAs, it sends all the wrong signals to borrowers, bankers and a variety of vested interests who have milked the system for far too long, playing with the money of ordinary people. This is what has given us a system in which a one-day default on an ordinary home loan is penalised while a default on a loan of hundreds and thousands of crores gets a free ride. If this doesn’t stop now, with fair play, reasonableness and a hard cracking of the whip for wilful defaulters, the NPA story will never end.

(The writer is a journalist and a faculty member at SPJIMR)