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Usha Thorat, deputy governor of the Reserve Bank of India (RBI), stepped down on Tuesday. In an interview with Mint, Thorat spoke on key issues ranging from autonomy of the central bank to financial inclusion and consumer protection, besides her impressions about the different governors she has worked with. Edited excerpts:

Thirty-eight years of central banking. How has it been?

It seems like yesterday I joined the bank. I don’t know how the time has passed. In one word, it has been terrific.

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What has been the most difficult phase—the East Asian crisis or the 2008 credit crunch?

I think 2008 was a very challenging period. The East Asian crisis had its own challenges, but its impact was limited. Apart from the effect on the currency for a brief period, there was no significant worry. From the point of view of enormity, 2008 was definitely more difficult. In both the crises, we were relatively insulated—though in 2008 we were more integrated.

Moving on: Thorat, who has been with the central bank for 38 years, says no organ of the government can be fully autonomous. Ultimately, all serve the same public policy and objectives, she adds. Ashesh Shah/Mint

What are the challenges ahead?

There are quite a few major initiatives in the pipeline. New bank licences, foreign banks’ operations in India, the role of holding companies, supervision of conglomerates, and market development to support infrastructure financing, etc. We have done a lot of reforms in the post-2008 period—credit default swaps, repo in corporate bonds, currency futures and options…

The toughest challenge?

The biggest challenge is to be able to be constantly vigilant on where the possible risks to the system could emerge—domestic or international—and taking timely and appropriate measures.

You have been part of the inner circle of the RBI governor for quite some time. Your take on different governors?

Clearly, each governor is unique. My position was also different with each governor and that does influence the relationship.

Dr (C.) Rangarajan is inherently a professor and even in his work he brought in the professorial approach—everything is built on a sound theoretical construct. He has a fundamental understanding of the macroeconomic relationships and is quite confident from this understanding that certain outcomes should inevitably follow. The liberalization of gold is an example of the courage of his conviction. He knew that it would kill the hawala market and would not, as critics predicted, fritter away the country’s forex reserves.

Dr (Bimal) Jalan came in just as the Asian crisis hit us. It was an extremely volatile situation with foreign funds pulling out, bringing the currency under pressure. Even though the rupee was quite appreciated at that time (in real effective terms), his first priority was to ensure that the markets did not see the movements in the rupee as evidence that we were part of the Asian crisis. His first task was to stabilize the exchange rate and he used all measures—market, monetary and administrative—to ensure this. He has an intuitive understanding of market psychology. He challenged the received wisdom on exchange-rate management, especially the corner solutions.

Dr (Y.V.) Reddy is an “ideas" person—extremely strategic. He looks at structures and institutions. In many ways, he challenged the very way in which we, in RBI, worked. He put in place processes and systems to bring in wider perspectives and innovative ideas from experts and market participants... We got lots of ideas from lots of people. As a governor, he set out a clear agenda and set very high standards, so you just had to deliver…

A lot of people say Reddy the deputy governor was very different from Reddy the governor.

Dr Reddy the deputy governor had the luxury of being the deputy governor in the sense you are not dealing with RBI as a whole. You can also be more innovative and can give your governor some challenges. Hence these two positions are very different.

Are you giving challenges to Subbarao?

You should ask him that question! Dr (D.) Subbarao gives a lot of space to his deputy governors and is extremely focused. On certain matters, he is emphatic…for example, in communication. He is also extremely sensitive to the fact that RBI should not be seen as an enigma by people and it should reach out in every way...

Is he a consensus man?

I would say he is an extremely team-oriented person. Inclusiveness is a hallmark of his way of conducting business… He encourages people to give their views and many meetings turn out to be more of a learning process for the senior officers. He is certainly a consensus person.

Subbarao, Reddy, Jalan all came from the government and yet there is always tension between government and RBI. Once they are with RBI, they start fighting with the government.

It’s a healthy tension and results in best outcomes…

How autonomous is RBI?

I don’t think any organ of the government can be fully autonomous. Ultimately, all organs serve the same public policy and objectives. You may have slight differences of perception at some point of time…broadly the objectives are inclusive growth and financial stability. By and large, there is a consistency of approach.

How much of the monetary policy is yours?

I would say it is the sum and substance of the entire process that goes into it—including what is gathered from various sources. And there is a kind of consensus. Ultimately it is ours.

Should debt management be separated from RBI?

Debt management in its essence revolves on the composition profile and timing of debt issuance. How much should be foreign currency, how much rupee, how much floating, how much fixed, what kind of instruments, what type of auctions, what calendar... Right from the 1990s, when RBI started active debt management, decisions are taken in consultation with the government. Hence, even if separated, the government will need to coordinate and consult with RBI, especially when there are so many interdependent factors that affect the outcome—for example, of an auction.

The fiscal deficit is very high. Is this the right time for the government to handle this job?

Irrespective of whether the fiscal deficit is high or low, debt management has to be done in total coordination with monetary management. Because, even if the government has surpluses, the DMO (debt management office) has to coordinate with RBI on when the surpluses are going to be pushed into the system, or if deficit, when they will be absorbed from the system.

RBI is 75 years old and yet 40% of the Indian population still doesn’t have access to banking.

I don’t think we can look at just this indicator and say RBI has failed. A sizeable percentage of the population is still below the poverty line.

There are several locations that are not easily accessible by all-weather roads. Look at many of the human development indicators—we are still not there.

If you say financial inclusion is one of the failures, I would say, yes—we have not been able to arrive at the right business model which delivers financial inclusion. I also admit that there is much more to be done. But it is an inevitable part of society, which is trying to meet growth aspirations and create entrepreneurial opportunities. The correctives for market failure are ensured through priority sector lending norms and credit-linked subsidy schemes for the poor.

What form of intervention is the central bank looking at?

We still have a largely public sector banking system and there is an owner’s focus on financial inclusion. It’s not so easy when it comes to the private sector banks… But even though we might be able to have an overall public policy through directions, unless it is a sustainable business model, we won’t be able to upscale it significantly. That is what is needed now—the scaling up at a reasonable cost. I think we are in a position to do this now.

How many years will it take to get 100% financial inclusion?

Hundred percent financial inclusion is really a choice of the person. We have to make sure that anybody who wants to have access to a bank account can have the access at an affordable cost. We are targeting about 75,000 villages by 2012. There is a clear road map and in each state the villages have been allocated to all the banks for ensuring that all the targeted villages are covered by a business correspondent if a brick and mortar branch is not considered viable. I don’t think it is an impossible target to achieve.

I would say the more important challenge is: How are we going to deal with the hundreds of millions of customers for providing credit, in terms of appraisal, supervision and follow-up, and ensuring that credit is linked to livelihood and income-generating activities. We need to create the whole ecosystem of providing the enabling conditions for the flow of finance to micro and small enterprises.

Supervision and regulation are two of your portfolios. RBI seems to a be soft regulator. You don’t do anything when banks do not treat their home loan takers with fairness.

I thought people say we are a very intrusive regulator; that we get into micro management.

One needs to go to an ombudsman to get justice as you don’t do anything. You are pro-bank and anti-consumer.

I certainly would not agree with that. Clearly, the focus of any banking regulator is safety of depositor’s funds, systemic stability and consumer protection. If you don’t have sound banks, will there be any bank customers?

Consumer protection was always a part of our regulatory system—now we have made it into an exclusive and separate department as it requires a separate focus.

Consumer protection is about ensuring that systems exist in banks to give a fair deal to the customer in terms of delivering promised services, ensuring transparency, avoiding mis-selling and eschewing unequal contracts. The banking ombudsman deals with specific complaints, but for the ombudsman to be effective we have to see that the banks’ own customer complaint machinery works.

You are also soft on the chief executive officers (CEOs) of public sector banks. On many occasions, the CEO of a bank retires and the quality of assets deteriorates and profitability gets hit. We have not seen the central bank taking any action.

What kind of action? Ultimately, we have to go by the requirements of solvency, liquidity, etc. If there is a large divergence between what the bank has reported and what our inspection team finds out, then the auditors are questioned and the bank is questioned. Through audit and inspection we make sure it is not repeated.

Some banks are brought under closer monitoring. There was a case when we did bring a bank under monthly monitoring and it did have the intended impact.

I agree with you to a certain extent that we are slow to act, but that is because we have to make sure that we have taken into account all facts and are objective in our actions.

You had said a few years back that you will be very happy to allow foreign banks to come to rural areas. But when they want to set up branches in rural India, the central bank doesn’t allow them.

We have given more branches than our commitments. I am not sure we received any applications for opening branches in unbanked rural centres.

As a regulator, the central bank isn’t entirely consistent sometimes. There are quite a few banks in which promoters haven’t brought down their stake to the required level, but you forced the merger of an old private bank with another bank for its failure to pare the promoter stake. Incidentally, you had invited the promoter of the old bank to play the white knight a decade back.

Are rising non-performing assets a big concern?

With the downturn that followed the global crisis, it is inevitable that NPAs would increase, especially in sectors affected by the crisis. The restructuring guidelines were issued to protect the economic value of assets and such loans had to be disclosed at an aggregate level. Some of the restructured assets may turn into NPAs but banks have been told to build provisions to 70% of their NPAs and so there will be a buffer to handle these NPAs and financing of growth won’t suffer. Rising NPAs are a matter of concern if they reflect poor credit management and not when they are a part of business cycles. As regulators, our job is to ensure banks build up provisions in good times that can be drawn down in bad times.

The core banking system (CBS) has also helped banks as today there is a much better control on possible NPAs at branch level not getting disclosed. This is very useful for the auditors.

What is your take on the controversy surrounding the microfinance industry?

The situation is extremely complex and sensitive because we are talking about millions of women who are accessing credit through microfinance institutions in the context of very high growth reported by this sector in the recent times. About 70% of their funds are coming from the banking system. The issues are around high interest rates, multiple lending and coercive recovery practices. The experience shows that if there are interest rate caps, outreach is inhibited and the model doesn’t scale up. On the other hand, even after scaling up, if rates don’t come down, it is because there is no competition.

In any retail lending business, there is need for consumer protection law and more importantly credible enforcement machinery. It has to be ensured that there is no over-financing and. that the system is not pushing debt beyond the capacity of households to borrow. There has to be responsible lending and responsible borrowing. The RBI has set up a board-level committee to go into this issue in all its ramifications.

Is lending through money lenders a better route?

I don’t know. In India, traditionally money lenders charge exorbitant interest rates and the borrowers never really repay the principal. More than harsh recovery practices, what actually happens is that the borrower loses his assets -- land and movable assets. The RBI technical group on moneylenders had done a study of 177 districts in 25 states and found that poor people really don’t have any option except to go to the money lender. We cannot wish them away.

The solution is greater penetration by the formal sector and strengthening the SHG (self help group)-bank linkage. If that’s done, the interest rates charged by moneylenders come down. In an outreach programme in Trichy, I found that in Tamil Nadu, the influence of money lenders and microfinance in rural areas is much less. I was told it was because grassroot-level cooperatives and the SHG-bank linkage programme in Tamil Nadu are both strong. I am not sure whether this is the reason.

Private players who enter the banking space may not be very keen to play a significant role in taking banking services to the poor.

I am not sure about this. I think there is a huge business opportunity, provided full advantage is taken of technology, delivery channels and product development. Some NBFCs (non-banking finance companies) have shown that small businesses can be financed on very large scale with good recovery performance. The question we have to ask is: what is limiting the existing banks from penetrating the underbanked areas? Is it all only about competition ?

Will large business houses be interested in going rural?

Many of them, in their presentations to us, have said they would be interested in doing so. The issue is: how do we make an assessment on the credibility of the business model put forth?

I would only say that our approach has not been inconsistent.

What are the three most critical areas in Indian banking that we should watch out for?

First is ensuring we have the requisite expertise, second is having an effective delivery model and third is financing the small and micro sector. We have to be much more innovative in meeting the needs of this sector.

Finally, life beyond RBI? We know yoga and bird watching are your pastime.

Family, my six-month-old grandson. I want to give more time for family apart from pursuing my hobbies and other interests.

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