Money & Banking

Amid turbulence, a man left to his own devices

Our Bureau Mumbai | Updated on December 11, 2019

RBI Governor Shaktikanta Das   -  Paul Noronha



Whenever a top bureaucrat, current or former, takes over the reins of the Reserve Bank of India (RBI), there is a perception that he may do the government’s bidding when it comes to decisions on interest rates and regulatory issues.

So, when Shaktikanta Das, former Secretary, Department of Economic Affairs, Ministry of Finance, was appointed the 25th RBI Governor, the intial perception was that the central bank would become an extended arm of the ministry. But then the RBI Governor’s position is such that it inspires the incumbent, notwithstanding the fact that the government has appointed him to act independently, despite North Block mandarins trying at times to nudge the regulator to act in a certain way. Das seems to be fitting into this mould.

RBI insiders say the genial Das, who completes the first year of his three-year tenure as RBI Governor on Wednesday, is his own man. He patiently absorbs views/ feedback on the state of the economy and the financial system from internal and external stakeholders, but takes his own calls on how to steer them through the current turbulent times.

Policy decisions

After cutting the policy repo rate by a cumulative 135 basis points over the previous five bi-monthly policy reviewsbeginning February 2019, the six-member monetary policy committee (MPC), under his leadership, left the rate unchanged at 5.15 per cent in the latest policy review.

In this regard, his recent comment that “we want the earlier rate cuts to play out fully and we cannot be sort of mechanically reducing the rate every time” was probably directed at the government.

Reading between the lines, it could be interpreted to mean that the RBI has played its part to lift the economy out of the current slowdown and wants to keep its powder dry for a future rate action, and the ball is now in the government’s court. It has to do some more heavy lifting.

Amid the flurry of rate-cuts, the committee even experimented with an unconventional cut – 35 basis points – underscoring that there is nothing sacrosanct about hiking or reducing their interest rates by 25 basis points or multiples thereof.

In the last one year, the RBI had to grapple with the fall-out of the troubles at IL&FS and DHFL, the consequent liquidity crunch faced by non-banking finance companies (NBFCs), banks turning conservative in lending to NBFCs, permitting banks to come out of the prompt corrective action (PCA) to ensure that they start lending, a central board member becoming vocal about the need to provide one-time restructuring of MSME loans, and the fraud at the Punjab and Maharashtra Co-operative (PMC) Bank.

It also had to deal with issues related to the transfer of its surplus and excess provisions to the government; come up with a revised framework for resolution of stressed assets (in the wake of the Supreme Court holding the February 12, 2018, circular on Resolution of Stressed Assets as ultra vires); and cut GDP growth projection for FY2020 four times from 7.2 per cent made in April 2019 to 5 per cent in the December bi-monthly policy review.

That Das is open to suggestions is probably underscored by the fact that the RBI issued guidelines on the restructuring of advances to Micro, Small and Medium Enterprises (MSMEs), which was a key demand of one of the board members.

Mutual understanding

In fact after he took over as Governor, the meetings of the RBI’s central board and the central bank’s deliberations with the finance ministry have taken place in a spirit of mutual understanding, say the sources cited above.

Das will have his hands full for the next two years, trying to push up growth along with the government, reining-in incipient inflationary pressures at the retail level, ensuring effective transmission of the past rate cuts in the financial system, ensuring that NBFCslend without a hitch, and getting banks to lend more after doing proper due diligence.

Significant decisions taken

To tackle issues being faced by NBFCs and core investment companies (CICs) in the wake of the IL&FS and DHFL debt default imbroglio, the RBI prescribed a liquidity risk management framework for these entities. It also asked NBFCs to appoint chief risk officers.

The RBI relaxed end-use stipulation under the external commercial borrowing framework for corporates and NBFCs. It also announced measures to enhance flow of credit to the NBFC sector, whereby bank credit to registered NBFCs (other than microfinance institutions) for on-lending is eligible for classification as priority sector lending.

The central bank reduced risk weight for consumer credit except credit card receivablesand introduced. Banks were asked to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark, with effect from October 1.

In the wake of the letter of undertaking scam at Punjab National Bank and debt defaults at IL&FS and DHFL, the RBI reorganised its regulation and supervision departments. The restructuring was done with the objective of having a holistic approach to supervision and regulation of the regulated entitiesto address growing complexities, size and inter-connectedness and also to deal more effectively with the potential systemic risk that could arise due to possible supervisory arbitrage and information asymmetry.

After a review of the performance of the existing small finance banks (SFBs) and to encourage competition, the RBI issued guidelines for ‘on-tap’ licensing of SFBs in the private sector. To get banks to lend more, the RBI brought a host of banks such as Bank of India, Bank of Maharashtra, Oriental Bank of Commerce, Allahabad Bank, Corporation Bank and Dhanlaxmi Bank out of the restrictive PCA framework.

In July, Das said that several challenges remain to be addressed in the banking sector, particularly with regard to the stressed asset resolution and credit flows to needy sectors.

In his meeting with public sector bank chiefs, he flagged issues such as the less-than-desired level of transmission of monetary policy rates; credit and deposit growth on the back of a slowing economy; flow of credit to the needy sectors while following prudent lending;, robust risk assessment and monitoring standards; improving recovery efforts; giving impetus to resolution of stressed assets; strengthening internal control mechanism for improved fraud risk management; and recent initiatives to address issues related to NBFCs.

Published on December 11, 2019

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