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The argument that the Reserve Bank of India is not a free bird is founded. An elected, authoritarian, or even unbalanced political leadership is superior to a set of experts, including the highly accomplished economists who run the central bank. So we have section 7 of the RBI Act, which empowers the government to intervene and ask the governor of the RBI to respond to his wishes if such a situation arises. But never before has this provision been used. So why did the government feel obliged to do it now?
Three aspects of the situation make this question relevant and urgent. First, it is barely two years since the government appointed Urjit Patel, its nominated candidate, to the governorship of the RBI. This appointment took place after the unseemly manner in which his predecessor, Raghuram Rajan, left office. Yet relations between the government and the RBI have deteriorated rather quickly. This is despite the fact that Patel has been criticized for violating the government's demonetization policy. Second, the government has not stood up well to the scrutiny of institutions and the integrity with which they should function. The case of the IWC shows how deep and tangled decay is in a partisan political agenda. Why would the government open another front, unless it is considered so important in its agenda, no matter what? Thirdly, what is at stake in the dispute between the government and the RBI is nothing less than the economic security of the country. We are in the midst of a crisis in our banking sector, with non-performing badets (NPAs) currently in the order of 10 million kroner and rising. The current dispute between the government and the RBI is therefore at the heart of broader issues relating to the banking system and the country's financial stability.
In simple terms, can banks with a high NPA (and other alarm signals) operate and develop their loan portfolio without strict restrictions, without strict supervision? and without the prospect of further regulatory action to repair decay? This is what fast corrective action, or PCA, is all about. It specifies a strict diet for a critically ill patient. This regime includes increased supervision, restrictions on credit expansion, bank branches, staff, overseas operations, and so on. Eleven public sector banks and one private bank (Dhbadakshmi Bank) are now part of the CPA. PCA-flagged PSU banks have a gross NRR of nearly 3.47 million crores as of June 30, 2018 and a net PRN of nearly Rs. 1.7 billion – staggering figures for our banks. The State Bank of India, the largest bank in India, announced Monday its quarterly results. SBI, which is not part of the PCA, has stated that its gross NPP and net APN ratios have improved from one quarter to the next, but we are still talking about crore of 2.05 lakh on the 18th September 2018.
How does the country come out? of this trap? The RBI circular of 12 February 2018 gives banks 180 days to settle an account in default, failing which it goes directly to the bankruptcy process under the recently established Bankruptcy Code or IBC. The idea of continually restructuring a loan and the larger game of lending sustainability can end once and for all with the CIB put in place. The circular also requires a weekly report of defaulting loan entities (exposure of 5 crore and more), as well as a monthly report from all those who do not meet their payment schedule, even at most a day. This strict deadline of 180 days to refer the case to IBC is what the government and some electricity companies are asking the RBI to relax its obligations.
To this is added the dispute that seems to overwhelm all the others – the government would have insisted that the RBI draws on its reserves to give him 3.6 billion rupees, decision criticized and condemned by many central bankers .
All the implications of this dangerous game, yet never played, and that may be run with the help of the & # 39; Brahmastra "of Article 7 of the RBI Act, are not yet understood, but it is generally accepted that the fallout can not be good. In addition, the government wants a more liberal approach to lending at a time when it believes that there is a lack of liquidity in the market. The demands are outrageous and follow the footsteps of the disaster of demonetization. And things can get worse as elections approach.
Governments want expansion, spending and optimistic signals that accompany growth. the RBI wants to look at the longer-term horizon and ask questions about how to finance expenditures and the consequences of spending when revenues do not grow. Tax desecration is the business card of governments. The call for fiscal rectitude bears the signature of the RBI. Meaningful political leadership can push the RBI, given its political needs, but it must also know when to stop. It can not demoralize, demonize and break the very institutions that over the years have been the pillars of sound advice in the interest of sustainable growth and financial stability. Supporting and strengthening the capacity of the RBI to say "no" to the government, it is strengthening the nation; Felling it is not only an badault against the RBI, but also against the nation. Worse still, in the case of NPAs, it sends wrong signals to borrowers, bankers and various interest groups who have been dragging the system for too long, playing with ordinary people's money. That's what gave us a system in which a day-to-day default on an ordinary home loan is penalized, while a default on a loan of hundreds and thousands of crores benefits from 39, a free ride. If this does not stop now, with fair play, reasonableness and brutal cracking of the bad for deliberate misses, the story of NPA will never end.
(The writer is a journalist and a faculty member at SPJIMR)
(Through the Billion Press )
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