RBI failed in doing this by giving a body blow to commercial banks and instructing them to identify bad loans with immediate effect and not in a phased manner
Reserve Bank of India’s (RBI) top brass comprises of persons with the outstanding calibre, and they should know even more than ordinary citizens that their public statements can make or break the economy of the country. Still, we are not to forget that reasonable dissent must be allowed to uphold the integrity of our institutions. In this light, hereunder are some questions that seek answers from RBI.
First, let’s talk about non-performing assets (NPAs) and the 2016 initiative of the central bank mandating strict provisions for stressed assets. NPAs are a common phenomenon in any economy since not all borrowers can service loans in a time-bound manner owing to many reasons which can be within (bad management decisions or embezzlement of borrowed funds) or beyond their control (unfavourable market conditions or sudden change in government policies). Prudently tackling with NPAs involves identifying stressed assets in such a manner that they do not adversely affect future lending operations of banks.
What about RBI’s deliveries in its present functions? Now that everyone is discussing and finding faults in the IL&FS episode, barely is anyone trying to reach to the bottom of the issue. Credit rating agencies (CRAs) of India had until recently shied away from flagging IL&FS and downgrading it despite the financial mess that was growing within due to asset-liability mismatch
RBI failed in doing this by giving a body blow to commercial banks and instructing them to identify bad loans with immediate effect and not in a phased manner. Imagine, the dust that was being continually brushed under the carpet was taken out all of a sudden and banks were ruthlessly asked to clear the mess immediately.
Making of the Crisis
What happened was almost all public sector banks posting unprecedented losses and a double whammy of lost confidence in banking institutions (that otherwise would have made dividend payments to support GoI’s expenditures) and curb in lending activities. The government had to step in and earmark budgetary resources (which otherwise would have been used to fund infrastructure growth, thereby creating jobs) to recapitalise banks. The question is why RBI recklessly pursued bad asset recognition exercise rather than undertaking it in a time-bound manner?
Second, let’s talk about regulation of RBI over banking institutions. RBI seeks greater autonomy in this respect but is the current framework so bad? RBI conducts Annual Financial Inspection (AFI) of commercial banks where the central bank assesses many aspects including loan books and financial health of banks. In the year 2016, RBI took a sudden, rather knee-jerking decision, of increasing the sample size that it analyses and unearthed many skeletons in loan books that had hitherto remained hidden. Loans that were extended without proper due diligence and were on the cusp of turning bad should have been noticed by RBI prior to 2016 during its AFI exercise.
However, this never happened. Moreover, while the central bank enjoys vast powers concerning private banks- where it can remove CMDs, call a meeting of Board, appoint observers and remove managerial brass- it failed to rein them in, and it was only after the Asset Quality Review exercise that lenders such as ICICI Bank abruptly recognised stressed assets. The question is why RBI did not tough act before 2016, and properly conduct AFI?
Third, RBI has openly voiced its concern over establishing a separate regulator for payments as suggested by the government. RBI’s rationale is that since all digital payments have an underlying bank account and banks are regulated by it; there exists no need for a separate regulator as it would result in overlapping jurisdiction and synergy would be compromised. Although the data isn’t available on how many digital transactions fail on a daily basis, for example when a person uses the UPI interface to transfer money from one bank account to another, one can easily guess that the number is substantial. RBI, the institution that oversees functioning of banks, has a mandate to keep inflationary forces under control and undertake various measures like open market operations (OMO) to infuse/ curb liquidity and sell/ purchase dollars to manage rupee exchange rate, cannot be expected to handle payment ecosystem, thereby justifying the need for a separate regulator. The question is why the central bank wants to hold on to power?
Fourth, what about RBI’s deliveries in its present functions? Now that everyone is discussing and finding faults in the IL&FS episode, barely is anyone trying to reach to the bottom of the issue. Credit rating agencies (CRAs) of India had until recently shied away from flagging IL&FS and downgrading it despite the financial mess that was growing within due to asset-liability mismatch. Although CRAs are regulated by Securities and Exchange Board of India (SEBI), they are also accredited by RBI to undertake rating exercises for large loans, commercial papers and Letter of Credit. It was only in July this year that RBI contemplated undertaking a joint audit of CRAs along with SEBI. The damage, however, was already done. IL&FS, which enjoyed debt rating of highest standards, defaulted on its obligations and the ripple effect was felt across the sector. In a flash, almost every NBFC stock headed south owing to liquidity crunch in the sector. The question is why RBI did not rein in CRAs proactively?
It is easy to criticize the ruling Government than to admit own blunders. And RBI chose the former to take the spotlight away from its own failures as listed above. Indeed, the central bank deserves its share of autonomy to maintain the health of India’s banking sector and undertake timely remedial actions in cases of divergence. However, the wise men of RBI cannot stand vindicated when they openly blame the government of the day without any rationales whatsoever. Foreign investors are already pulling money out of emerging economies due to rising interest rates in the United States; hence a public rift between the government and country’s central bank will only further erode confidence. At a time when the country desperately needs investment for infrastructure growth and to create jobs, the RBI’s dissent is an unjustifiable endeavor. Setting own house in order ought to be the priority of RBI.
(The writer is an ex-Director of PNB & Dena Bank)
(The article Has the RBI failed in Lining-up the Banking Reforms? A few questions for the Central Bank from a top banker is published in ‘Organiser’ )
The last year of BJP rule has been tumultuous. Oil prices have regained strength and rupee is sliding like never before. Now RBI-government tussle is driving away foreign investors. 2019 will be interesting.
During UPA 1 and 2, Indian banks were lending without proper due diligence to corporates. Why was RBI sleeping then and did not find this out in their annual assessment of banks? Answer this question.
For Raghuram Rajan there was pressure from outside the organisation but now the pressure is from within after BJP appointed an RSS economist on board of RBI. They are hijacking all institutions.
It is absolutely true that India needs a separate regulator for payments. RBI deals with inflation and setting repo rates so they cannot do all work by themselves. A different agency is much needed.
Look at IMF that has warned India over violating the independence of Reserve Bank. They all have foreign interests and want the Indian economy to break to benefit other manufacturers in the West.
This time even Subramanian Swami has sided with RBI. He is the same man who was against Raghuram Rajan as RBI chief. Autonomy of central bank cannot be compromised at any cost.
Liquidity after IL&FS debt default has dipped since banks are not ready to lend to NBFCs and HFCs. Why can’t RBI earmark some liquidity for NBFCs like they did during the 2008 financial crisis?
IL&FS default has indirectly hurt banks such as SBI which are shareholders in the company. Government should consider punishing the responsible managerial persons of IL&FS.
Everyone knows how bad is the health of Indian banking system and this is because RBI did not notice bad signs proactively. Now they have suddenly started cleaning up the mess but at the expense of growth.
Modi government should realise that the rift between RBI and them is hurting investment and Indian currency. In its quest to usurp all public offices, BJP is compromising with economy.
Rarely do I come across a blog that is both educative and amusing, and without a doubt,?you?ve hit the nail on the head.
it is an amazing piece of writing designed for all the online visitors. they will get benefit from it I am sure.
Rather nice post, i certainly enjoy this internet site, keep on it
This is the perfect webpage for anybody who hopes to understand this topic.
Pretty. This has been a really wonderful article. Thanks for supplying these details
I started to read your article and it caught me to the extent that I could not put it down. Amazing piece.
I just want to mention I am all new to weblog and truly savored this blog site. Likely I want to bookmark your blog . You actually have terrific articles. With thanks for sharing with us your web site.
Great blog you have got here.. it is difficult to find high quality writing like yours these days. I truly appreciate people like you. Take care..
I commend you for your excellent writing. A well researched one.
I visit daily a few web sites and sites to read articles or reviews, however this blog provides feature based articles.
Could not stop myself from appreciating your article. An excellent one.
Such well drafted articles are not easily found on web. Cudos.
Nice Post
Excellent article. We are linking to this great content on our site. Keep up the great writing.
If some one wishes to be updated with most recent technologies therefore he must be pay a quick visit this site and be up to date all the time.
Quality posts is the important to be a focus for the people to visit the web page, that is what this web site is providing.
I blog often and I genuinely appreciate your content. ?This article has really peaked my interest.
I gotta favorite this internet site it seems very useful very helpful
Great blog, keep it up.
Hi, I do believe this is an excellent web site. I stumbledupon it. Money and freedom is the best way to change, may you be rich and continue to help others.
It is hard to find experienced people for this subject,?but you seem like you know what you are talking about.
I really appreciate your writing.
Hi there. This post could not be written any better. Thank you for sharing.
Way cool. Some extremely valid points. I appreciate you penning this post and the rest of the website is really good.
I am genuinely glad to glance at this webpage posts which consists of tons of useful facts, thanks for providing such statistics.
My family always say that I am killing my time here at net, however I know I am getting know-how all the time by reading such good articles.
Your article has been an inspiration to me. It has given me hope. Keep up the good work.
It was so awesome of you to take out time and express your thoughts on a topic so different.
I have learn several just right stuff here. Certainly price bookmarking for revisiting. I wonder how much effort you set to create such a fantastic informative web site.
I need to to thank you for this wonderful read.. I certainly loved every little bit of it. I have got you book-marked to look at new stuff you post?
I applaud the publications of yours.
I like the way you put thoughts forward
Hi there. This article could not be written any better.
The structure of the composition is good,buttry to make sure the word order in your sentences is correct.
It is a nice piece of writing which is rare to find these days.
This a wonderful blog submit. It is so nice when persons appreciate all that you do.
I wish to state my complements to the hard work you have done to incorporate so much of detail about every information.
Saved as a favorite, I really like your blog.
Thank you for the auspicious writeup.
Terrific article. That is the type of information that are supposed to be shared around the net.
These are in fact enormous ideas in concerning blogging. You have touched some nice things here. Any way keep up writing.
The website is bright, clean, quick, easily navigable and all the links seem to work well. Moreover, the contents here in blog shape is really wonderful.
The next time I read a blog, I hope that it does not fail me as much as this one. After all, I know it was my choice to read, nonetheless I actually thought you would probably have something helpful to talk about. All I hear is a bunch of whining about something that you could fix if you weren?t too busy seeking attention.
Very well documented.
Very nice article. I definitely appreciate this website.Stick with it.
You are so awesome. I do not believe I have read through a single thing like this before
Oh my goodness. Incredible article dude. Thank you
Very concise but well thought off.
Oh my goodness. Amazing article dude. Thank you so much
Thank you for some other magnificent post. Where else could anybody get that kind of information in such a perfect manner of writing. I have a presentation subsequent week, and I am on the look for such information.
I have read so many posts about the blogger lovers however this paragraph is in fact a fastidious paragraph, keep it up.
Great blog you have got here..
Pretty. This has been an incredibly wonderful article. Many thanks for supplying this information
it is in point of fact a great and helpful piece of info.
Really.. thanks for starting this up. This web site is one thing that is required on the web, someone with a bit of originality.
I honestly appreciate people like you. Take care..
The website is fantastic and something your group should be really proud of.
You definitely put a fresh spin on a subject that is been discussed for years. Wonderful stuff, just excellent.
Thank you for the introduction to the new website. I will be re-visiting it many times, but on a fast run-through it looks really great.
I definitely enjoyed every bit of it.
So good to find somebody with some unique thoughts on this subject matter. Really.. thanks for starting this up.
I appreciate you finding the time and effort to put this information together. I once again find myself personally spending a significant amount of time both reading and commenting.
Hi there to every one, since I am really eager of reading this weblogs post to be updated daily. It contains fastidious stuff.
It is always exciting to read through articles from other authors and?use a little something from other sites.
You have made some decent points there.
Amazing blogsite, greetings.
A powerful piece of writing. Very inspirational.
I am very happy I found this in my?hunt for something relating to this.
What a simplest and purest form of reflecting your views on such a difficult topic. Great going.
This is undoubtedly the most clean and clear form of writing that have seen so far. Congrats to attain this level.
Spot on with this write-up, I absolutely believe that this amazing site needs much more attention. I will probably be returning to read through more, thanks for the advice.