30

Though a section of the press declared that the Reserve Bank of India (RBI) and the Government of India (GOI) were joint winners of the much awaited ‘mother of all board meetings’ that was organised on November 19, the undisputed fact remains that the RBI emerged unscathed.

It did not lose anything. GOI was the lone loser. The predicted events did not materialise. The anticipated results were: (i) GOI proved it was the boss in money matters; (ii) GOI can “gobble up” all the reserves RBI, which were built up by central bank for maintaining its credibility as a monetary authority; and (iii) successfully “watering down” the so called PCA (Prompt Corrective Action) framework put forward by RBI along the strict internationally accepted financial norms for maintaining stability of the financial sector and banking institutions. None of them eventuated. Above all, the earthshaking event anxiously awaited was the resignation of at least one person which was RBI Governor Urjit Patel. It was also forecast that Deputy Governor Acharya would also quit. But the two are still continuing in office. It was a tame ending of a battle.

PCA framework

To deal with the rising non-performing assets of the banks, RBI had introduced PCA measures for 11 public sector banks which are in the red. RBI prevented them from further lending.  The measures relate to capital regulatory reforms, which included the minimum common equity Tier (CET) -1 ratio requirement at 5.5% as compared to 4.5% under Basel III framework. There are other requirements as well. They pertain to consumer credit loans and personal credit card loans. They are assigned a maximum of 125% risk weight as compared to 75%. The GOI wanted them to be relaxed, at least in regard to CET -1 ratio to 4.5% , so Rs. 6 lakh crore could be made available for overcoming the hurdles to credit flows.  The GOI also wanted the capital to risk weighted assets ratio of 9% be reduced to 8% so more funds will be released for more lending.

The RBI did not yield. One more extra year was allowed to arrange a capital buffer of 0.635% risk weighted assets. The PCA has now been referred to RBI’s Board of Financial Supervision for further examination.

The reserves

The GOI once wanted the reserves of RBI which are (Rs. 9.44 lakh crore, comprising Rs. 6.92 lakh crore of foreign currency assets and gold revaluation, as they vary in value depending on the prevailing rupee exchange rate; and Rs. 2.32 lakh crore under the head of contingency fund) for infusion of capital into the 11 sick PSBs.  Later, they revised their claim to a lower figure which was Rs. 3.96 lakh crore. These reserves are notional because changes in valuation arise from exchange rate changes.  The reserves help RBI to absorb any unpredicted monetary losses and sustaining loss of other kinds due to both domestic and external shocks. A high figure of reserves inspires confidence of financial sector in the central bank. In the most unlikely event of any wayward government coming into power similar to Zimbabwe’s Mugabe destroying the autonomy of the central bank, a dependent monetary authority cannot afford to depend on government for funds for paying salaries to staff and for its own existence. In the absence of sufficient reserves, no central bank can ever be able to say a firm no to “fiscal abuse” when government would like the central bank to print money for government budget deficits.

The recently concluded RBI meeting has decided to have the question to be examined by another committee, although a recent committee headed by a former deputy governor, Y. H. Malegam has decided upon sharing the profits by way of dividends. It is not clear whether the new committee would examine the sharing of reserves as well. The RBI will be allowing a debt recast of micro, small and medium enterprise (MSME) borrowers up to Rs. 25 crore. It will enable greater flows of credit to them.

Who gave and who took

There was no “giving in” by the RBI.  It was the Indian government which gave in. Was there a change of heart on the part of the government? No doubt, the impending elections are looming large. There has been widespread criticism of the present Indian government as well. They included former deputy governors of RBI including Rakesh Mohan along with former IMF economists including Easwar Prasad. The IMF quietly made it known that it was watching what was going on. They did not take sides any way. The GOI or the ruling coalition came to realise that economic matters of sophisticated nature, such as central bank independence cannot be taken to streets for forcing a decision. The public is not interested in any intellectual debate. They cannot be swayed by emotions.

Above all, the concern of the government must have been with the rating by international credit agencies and of course the ranking by World Bank and other institutions. GOI now knows foreign direct and portfolio investment inflows are dependent on such ratings and rankings in economic governance. Having improved its ranking  early this month in “Ease of Doing Business”  early this month to reach 77th rank by jumping 23 places, some wisdom would have dawned on the part of sarkari economic gurus and of course the party ideologues who have been inducted in the RBI Board recently.

Institutions under stress

It seems that institutional stress is on the rise. The current crises in the Central Bureau of Investigation with the Director and the Special Director accusing each other of bribery; and the intervention by the Supreme Court has raised a question on the independence of Central Vigilance Commission and the integrity of the Intelligence Bureau and Research and Analysis have been hitting the news headlines consistently. All these occurrences might shake people’s faith in the government. The current events led former President Pranab Mukherjee to say at a conference organised by the Pranab Mukherjee Foundation, “In the recent past, various institutions have come under stress.  There is widespread cynicism and disillusionment.”

— Dr T.K. Jayaraman is an Adjunct

Professor, Amrita School of Business, Bengaluru Campus