Urjit Patel’s tumultuous first year as RBI governor
Mumbai: Urjit Patel completes a year as the governor of the Reserve Bank of India (RBI) on Monday. It has been a period of tumultuous change in monetary and banking policy, including the demonetisation exercise and the central bank stepping in directly to deal with bank bad loans.
Along the way, Patel and RBI had to face questions on whether the central bank’s autonomy has been eroded, with their acquiescence to the government’s demonetisation move being part of it.
Patel had an easy start compared to his predecessor Raghuram Rajan, who battled a potential currency crisis when he took the helm of the central bank in September 2013.
But just a little more than two months after Patel’s elevation, RBI found itself holding the short end of the stick after demonetisation, with its role in the exercise becoming a matter of public debate.
RBI’s first monetary policy decision under Patel—an unexpected rate cut—in October was also seen as a favour to Delhi, despite the fact that the decision was not solely of the governor but of a monetary policy committee that included government-nominated experts.
What’s fuelled this debate is Patel’s preference for a low-profile and public appearances limited to monetary policy briefings. For instance, Patel has delivered six speeches since he took over as RBI governor. In contrast, his predecessor Rajan has written in his book that he “gave a speech on average once a month”.
The decision on demonetisation was taken by the government but RBI had to take most of the blame for the hardship faced by the public. The exercise was an extraordinary event, which called for more communication by the central bank with the general public, and to bankers who had to face their customers’ anger.
Even in other matters such as the new monetary policy committee’s structure, Patel should have communicated more, some people said. “The Indian financial market has always been used to a personality-driven monetary policy. Hence, there is need for more communication, especially by the governor, on aspects of liquidity, inflation forecasting, etc.,” said a Mumbai-based economist who declined to be named.
Former deputy governor R. Gandhi said the choice of speaking in public is the prerogative of every governor. “This is an individual characteristic and we should not read too much into it,” he said.
To be sure, Patel has spoken on matters concerning monetary policy and price stability.
He has been vocal about farm loan waivers, which according to him impact credit culture adversely and entail inflationary pressure. He has also called for better alignment of the administered rate of small savings schemes for faster policy transmission, and pressed for stepped-up recapitalization of public sector banks.
The increasingly independent views emerging in the monetary policy committee and its refusal to engage with the finance ministry is also settling the debate on RBI independence, some said.
Refusal of the invitation to a meeting with finance ministry officials “clearly demonstrates Patel’s independence in determining monetary policy and regard (for) stable price development as (RBI’s) primary goal”, said Hugo Erken, a senior economist at Rabobank’s economic research wing.
The war on bad loans took an unprecedented turn under Patel’s governorship. When he took over, the bulk of the recognition of non-performing assets across banks had been completed. Resolution was the remaining piece and it was sluggish as bankers feared that their decisions may attract scrutiny as the solution entailed them sacrificing some interest dues.
The government, through an ordinance, amended the Banking Regulation Act, empowered RBI to suggest to, and even compel, banks to invoke proceedings against defaulters using the Insolvency and Bankruptcy Code.
RBI’s role in the resolution of stressed loans again led to a debate on potential conflict of interest as the central bank also regulates lenders.
Nonetheless, the Patel administration drew up a list of 12 large defaulters and asked banks to initiate insolvency proceedings against them at the National Company Law Tribunal.
RBI has drawn up a second list, of at least 26 defaulters, where banks have been given a 13 December deadline to come up with a resolution plan.
“RBI has been moving fast and leaving no stone unturned on the resolution of bad loans. This shows that cleaning up bank balance sheets is one of the top priorities,” said a senior banker on condition of anonymity.
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