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Business News/ Market / Stock-market-news/  Raghuram Rajan leaves unfinished business at RBI
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Raghuram Rajan leaves unfinished business at RBI

From a new monetary policy framework to changes in bank licensing, the list of what the RBI has achieved under Rajan is long. Here's what's left

Photo: Aniruddha Chowdhury/MintPremium
Photo: Aniruddha Chowdhury/Mint

Raghuram Rajan’s exit note to employees of the Reserve Bank of India (RBI) spelled out what the central bank had achieved over the past three years. From a new monetary policy framework to changes in bank licensing and market development measures, the list of what the RBI has achieved under Rajan is long.

A shorter, but equally important list, is that of Rajan’s unfinished agenda, among them the clean-up of banks’ balance sheets and the setting up of a monetary policy committee.

“While all of what we laid out on that first day is done, two subsequent developments are yet to be completed. Inflation is in the target zone, but the monetary policy committee that will set policy has yet to be formed. Moreover, the bank clean-up initiated under the asset quality review, having already brought more credibility to bank balance sheets, is still ongoing. International developments also pose some risks in the short term," said Rajan in his message.

Of these, the clean-up of bad loans may be the most immediate task that needs to be taken to its logical conclusion.

The asset quality review conducted by the RBI revealed a large amount of bad loans lurking within bank balance sheets. The central bank combed through large accounts and insisted that those which were visibly stressed be classified as non-performing assets.

The result was that bad loans across the 40 listed banks had increased to 5.8 trillion at the end of March from 4.38 trillion at the end of December. At the end of the September quarter, bad loans across 39 listed banks were at 3.4 trillion. The data for the September quarter excludes IDFC Bank Ltd, which started reporting earnings as a bank only in the December quarter.

Commenting on Rajan’s departure, Raamdeo Agrawal, joint managing director of Motilal Oswal Financial Services Ltd, said, “He opened up the banking system, he courageously took on the system to address the bad loans issue of banks. These were the revolutionary changes he brought in. It is very unfortunate that at this juncture when things were finally settling for India, we have to embrace this change."

Some fear this resolve to tackle bad loans and to get tough with errant promoters may be dealt a blow. Rajan took a tough stance from the beginning. While he has maintainted that not all promoters are bad, he has equally said that promoters cannot take things for granted.

“Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures," Rajan had said on 4 September 2013 when he took charge as the governor.

A senior official at a fund house, who did not wish to be named, said, “All those errant promoters will probably feel relieved. He has spoken quite a bit against them. They also wanted aggressive rate cuts. They were worried about RBI’s crackdown on bad loans."

A senior banker, who also declined to be named, expressed a similar sentiment and noted that the RBI’s efforts to stress test large corporate accounts for project cost and cash flows have not gone down well with business houses.

Arun Kejriwal, director of Kejriwal Research and Investment Services, however, felt it is too late to turn back the dial on the bad loan clean-up.

Likening the issue to a patient who has been “opened up" and is lying on the operating table, he said, “You don’t have the option to go slow now." The government and the RBI may want to complete the process of cleaning up bank balance sheets as early as possible, he added.

To be sure, the RBI has already put in place a framework for bad loan resolution and handed banks a number of tools to deal with errant promoters, should they choose to. Among these is the strategic debt-restructuring scheme, which allows banks to overturn the management of a company and take charge.

The recently introduced S4A (Scheme for Sustainable Structuring of Stressed Assets) also lets banks convert up to half of a stressed firm’s debt into long-dated equity like instruments.

Rajan’s departure also leaves unfinished the job of transforming the monetary policy framework. As part of the new framework envisioned by Rajan and RBI deputy governor Urjit Patel, the RBI would work to achieve an inflation target set in consultation with the government. The onus to achieve this target would lie not just with the RBI governor but with a monetary policy committee (MPC). The first part of the framework came into effect in 2015 with the signing of the monetary policy framework between the RBI and the government. The second part, which involves the setting up of the MPC, is still underway and is expected to be completed in this fiscal year.

Continuity would have been preferable from the standpoint of investors and in order to allow some of these unfinished tasks to be completed, said Kotak Institutional Equities in a note released on Sunday.

“We are quite baffled by the development (Rajan’s exit) as continuity would have been preferable in the context of 1. the RBI’s organizational progression (formation of MPC among other things), 2. the Indian banking system’s large NPL (non performing loans) problem; the RBI was playing a central role in addressing the problem, and 3. an uncertain and volatile global environment, especially with the Brexit referendum due on June 23," wrote Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities, an arm of Kotak Securities Ltd.

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Published: 20 Jun 2016, 12:20 AM IST
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