Is The Reserve Bank Of India Truly Autonomous?
We are only three months into this new year, and the Indian economy and finance circles have already taken a massive hit. Most of us had left 2019 behind with the hope that the government's financial policies and stimulus measures would begin to bear fruits this year.
However, the reality has been far from it, with the release of Q3 GDP data from 2019-20 has only worsening the outlook.
If this was not enough, the novel coronavirus has taken the panic up by several notches, wrecking havoc in the share market, and giving sleepless nights to investors. With the state of economy and finance in a barely precedented disarray, there are only a few institutions we can look upto for relief. With the Finance Ministry rolling out only limited measures to revive the spirit of our faltering economy and finances, we have only the Reserve Bank of India to fall back upon.
The apex bank of our country is tasked with setting the monetary policy and essentially looking after the financial health of our domestic market, and international exchanges.
In fact, with its theoretically apolitical composition, and a top rung of leaders with ample domain knowledge, the RBI has long been considered the light at the end of our economy's tunnel. Traditionally, RBI has been led by Governors with illustrious scholarly records in the field of economics, and been a credible vessel responsible for translating the government's broader vision into specific fiscal policies.
Right now, however, as the central bank struggles with rapidly plummeting confidence in our banking institutions, I can't help but wonder if the RBI still deserves our unwavering faith.
It is no secret that the central bank has been faltering in its responsibilities for a while. In fact, the scars of its barely healed relationship with the current government are still peeking through the smiles and waves, and it has done precious little of late to allay the concerns of the general populace. Even though we could have possibly ignored these signs like we often do, the Yes Bank fiasco has shone a bright spotlight on the surface of RBI's recent disorientation, forcing us to sit up and take notice of things that are possibly unfurling behind the scenes.
Erosion of RBI's Functional Autonomy
When Viral Acharya, the deputy governor of the RBI made caustic remarks about the central government's alleged interference into the operations of the apex bank, many were shocked. For most others, however, this came as a public articulation of something we had known for a while.
It was only shocking because a member of the RBI's top leadership had finally blown the covers on the growing rift between the central executive and the top banking body.
Ever since the time Raghuram Rajan's tenure as governor collided with BJP's anointment into power, the central bank began to have major disagreements with the executive leadership. In fact, the roots of these troubles were so deep that even the current Finance Minister has attacked Rajan by associating him with what she has termed the "worst phase" of India's banking sector.
Rajan's tiff with the government resulted in him being denied a subsequent term, and he parted with the executive on rather bitter terms.
His successor, Urjit Patel, was selected directly by the incumbent ruling party, allegedly to do its bidding by leveraging his position at the helm of the RBI. When Patel backed the deeply controversial and poorly implemented demonetisation initiated by the Modi government, everyone took him to be a glorified puppet of the BJP-led executive.
However, even this relationship soured soon, as the government and Patel's central bank began to differ on key technical issues.Throughout the leadership of Urjit Patel, the central bank had to contend with repeated pressures from the government to ease lending norms, and release more funds from its capital reserve to resuscitate the struggling economy. There were substantial disagreements on issues like the applicability of Prompt Corrective Action (PCA) frameworks to the public banks. Finally, matters came to a head when the government began to pressure the RBI for changing applicable criteria of one-day default norms for borrowers.
This time, Urjit Patel decided he had had enough and rendered his resignation, a first in post-liberalisation India.
Even Rajan, at the height of his conflict with the government had not packed his bag and left in the middle of a term. The resignation opened up the festering wounds of the stormy conflict, revealing the extent to which our government's alleged meddling had hurt the functional autonomy that the Reserve Bank was entitled to.
After Patel, the government appointed Shaktikanta Das, a former civil servant, as the governor of our apex bank. Das has an illustrious record to recommend him to nearly any position in the land, but he is, after all, a history major who made his way into what has traditionally been the turf of erudite economists.
This appointment sparked nationwide ridicule as people began to raise harsher questions about his competence to helm our supreme monetary body.
Since Das took office in 2018, Das probably had limited opportunity to clean up the mess that had been made in the wake of a bitter conflict.
But even that limited scope seems to have been poorly used to shut up the criticisms coming from his detractors. Although Das did adopt a few decently justifiable stances, like the decision to not introduce rate cuts anytime soon, his decision to transfer a huge chunk of the RBI reserve fund to the government baffled many.
In 2019, as the Finance Ministry continued to struggle, the RBI under Das conceded to the Bimal Jalan committee recommendations and sent an unprecedented amount of money on the government's way. It parted with 123,414 crores rupees, thereby leaving itself little wiggle room to step in and rescue banks when doomsday came calling. As for the government itself, it was more than happy to gain access to the reserve funds, which came as a relief in the face of mounting deficits. However, this move raised many other questions, which we simply did not have answers to.
Could we rely on the RBI to rescue us from the grasps of a financial debacle?
Had the RBI turned into a cash cow to serve the government alone?
Instability in Leadership
The indecisive stances of the RBI has been further exacerbated by the unstable leadership the apex bank has had to work under, over the course of the past few years.
Raghuram Rajan, a seasoned economist, brought a reform-oriented approach to the central bank, beginning what he has termed a cleaning up of the "clogged" pipelines of Indian banking. The period beginning from 2013-14 represented a crucial juncture for the RBI, as the Indian banking sector was dealing with problems that had piled up over the years. The increase in the volume of bad loans, and inadequate disclosures of mounting non performing assets had landed most private banks in a soup.
And it was the RBI's responsibility to bring them to task!
However, with the government refusing to side with the governor's vision, there was little constructive work that could happen. When Urjit Patel succeeded Rajan, the problems of leadership were intensified. Urjit Patel was not necessarily a terrible leader, but his stance was starkly in contrast with the autonomous approach that had been taken by Rajan. As the bank staggered to make change of the switch, the issues with the government only kept increasing.
Finally, Urjit Patel's abrupt resignation citing "personal reasons" dealt yet another blow to the constitution of the central bank. Shaktikanta Das's appointment did not much to soothe the leadership concerns within the RBI because as a former civil servant, his viewpoint was bound to vary quite a bit from his predecessors, who had been economics scholars. This crisis of leadership, accentuated by the rapid switched in leadership styles, only worsened the RBI's ability to introduce sustainable reforms.
The Yes Bank Debacle
If you have read only the headlines of recent financial news, you would know that the crisis of Yes Bank has unraveled to reveal massive cracks in the Indian banking sector. As RBI has recently suspended the bank's Board of Directors, and instituted a 45-day moratorium to pave way for the State Bank of India to take a 49% stake in Rana Kapoor's ailing Yes Bank, many have raised questions whether RBI moved in too late.
Yes Bank's troubles are nothing new, the bank has been making imprudent decisions, and taking on extreme risk exposure without appropriate precautions for a while now. As the crisis unfurled, the RBI continued to pressurise the bank to raise more capital, and poked holes in Yes Bank's account of the non performing assets it had.
The RBI's justification for this suggests that they were hunting for a solution from the market itself, but we can't help but wonder if the RBI could not have stepped in earlier.
Right under the central bank's nose, private banks and non banking financial institutions have been driving up the total volume of their NPAs without accounting for them effectively. Moreover, their risk exposure has also been going through the roof, intensifying the seriousness of the crisis. In the case of Yes Bank, RBI took its own sweet time. When it finally announced measures, they were abrupt and harsh, triggering panic among the bank's customers.
The Yes Bank disaster seems to be only a trailer to the horror film that is waiting to catch us unawares. The banking sector currently has extremely high exposure to unsecured loans, and the uninhibited retail lending seems to pushed their financial stability off the edge. RBI's inadequate governance strategies are largely to blame for the exacerbation of this crisis. If the apex bank does not step in soon, there could be more problems in the coming days.
The Fintech Story
In terms of fintech, the main regulatory body in our country has long been the National Payments Corporation of India or the NPCI. Overseeing the realm of digital payments, the NPCI has led India's entry into the times of digital payment revolution.
The RBI, having inadequately discharged the duties that it is traditionally tasked with, has now locked horns with the NPCI, alleging it of focusing too heavily on United Payments Interface (UPI).
It has recently moved to set up a New Umbrella Entity (NUE) as per a draft framework released in January. This entity will supposedly compete with the NPCI, and regulate the contours of India's burgeoning digital payments stage. This move by the RBI seems oddly vindictive, and represents a strange attempt to make a leeway into a new sector, without fixing the issues ailing its existing responsibilities. The framework is still in the draft stage, so we will have to wait and watch to find out the extent to which the RBI plans to take over the digital payments space.
Clearly, the apex bank has been struggling with a plethora of problems at the moment, and only strong leadership and concerted reforms can help it recover its past glory.
The government's meddling has created an uncomfortable situation in the corridors of RBI, and one can only hope such pressures are eased soon.
That way, we can finally count on the RBI again!