An agenda for Urjit Patel

Dear Governor Patel,

Let me join the large number of Indians in wishing you a very fruitful tenure at the helm of the country’s central bank, without avoidable tensions with the Union finance minister.

As the prestigious magazine, The Economist , commented, under your stewardship, monetary policy is expected to remain unchanged, but the regulation of banks is a more open question. As a person connected with the banking system for 58 years, let me take the liberty of making some suggestions in regard to banks and the ubiquitous black money in the economy.

Sore point The first one is a festering sore that had defied all norms of lawful behaviour by the law-makers themselves. I refer to the guarantees issued by the Centre and the State governments for loans granted by banks to or investments made in public sector undertakings (PSU). Many, if not all, of these PSUs are in financial stress and fail to service their bank loans or investments. And, the guaranteeing Central/State governments have never honoured, during the past six decades, their contractual obligations as guarantors.

Lest you dismiss the charge as gross exaggeration, let me invite you to the RBI’s own instructions on government-guaranteed accounts. The master circular issued on July 1, 2015, on “income recognition and asset classification norms” by the RBI states that “The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification … is not for the purpose of recognition of income. … With effect from March 31, 2006 State Government guaranteed advances and investment in Government guaranteed securities would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days”.

Obviously, governments regularly default on guarantee commitments to banks to warrant these instructions from the RBI. It cannot be held that guarantee obligations are less onerous than direct loans, as Section 128 of the Contract Act specifically states that the guarantor’s liability is co-extensive with that of principal debtor. Governments, who are law-makers, thus become law-breakers. The malady, of course, is caused by bureaucrats who might consider themselves above the law.

Follow the precedent Your officials would certainly ask as to what the RBI can do in the matter. In reply, I would recall a precedent. Some years ago, a few financially distressed State governments started defaulting on payment of interest on their SLR securities held by banks.

The RBI told the governments concerned that they had to pay and, if they failed to do so, the amount would be deducted from the proceeds of the next lot of securities to be issued by them, for paying off the investors. A similar arrangement should be put in place for both Central and State government guaranteed advances. Otherwise, what would your response be if any of your compatriots in other countries passed a comment on this untenable situation, within your hearing?

The next issue pertains to the black money in circulation in the economy. It is widely believed that in most property deals, black money is demanded by the seller and/or proffered by the buyer; the amounts in big cities run to lakhs of rupees in each deal. Similarly, for admission to privately run medical and engineering colleges, large sums of unaccounted money passes hands. These amounts are in the highest denomination notes of ₹1,000. RBI annual reports indicate that just in a span of six years from 2010 to 2016, the value of these notes increased by over 265 per cent.

It is high time this menace is curbed at least in high value transactions. The RBI should, with the consent of the Centre, withdraw these notes from circulation. Then, the volume of black money would be drastically reduced. To the sceptics amongst the intelligentsia, I would only cite the example of the US. The former president, Richard Nixon, abolished all notes in denominations of more than $100 in 1969 “to make life harder for the mafia”.

Demonetisation of such notes would, besides making life harder for the local tax evaders, help in vastly reducing the value of fake money allegedly circulated in our country by some hostile neighbours in pursuit of their nefarious designs.

Fear psychosis The last matter pertains to “fear psychosis” in public sector banks (PSBs). This has been commented upon repeatedly by many people and arises out of the vigilance rules of government departments being extended to PSBs for their normal commercial decisions. Besides this, any loss arising out of a loan going sour could become the subject of CBI enquiry; a civil liability is transmuted into criminal action only in regard to PSBs. It is necessary that the civil nature of liability be strictly upheld.

PSBs are facing a huge NPA problem because of delays in infrastructure projects and steep fall in commodity prices internationally. They should be helped to take quick corrective action. In this process, they are terribly handicapped vis-à-vis private banks because of the vigilance set-up imposed by the authorities. To cite an example, a few years ago, a big private bank had shares of the UB group as security for its loan: when the loan became NPA, it sold the shares at a loss to an NBFC on the basis of the circumstances prevailing then. After a few years, the NBFC sold the shares in the market and made a profit.

If a PSB had taken such a decision, all manner of vigilance actions would have been initiated. The overriding ‘vigilance’ set-up deters PSB officers from taking quick decisions, which would be in the best interest of PSBs, for fear of subsequent witch-hunting after many years. The thorough revision of the vigilance manual for PSBs brooks no further delay if the RBI wants orderly and prompt corrective action on the bulging NPA portfolio of banks.

To conclude, before the immediate tasks begin to take chunks of your valuable time, my sincere appeal is to have the above three issues addressed and suitable action initiated by the RBI.

Best regards,

A retired banker

The writer is former deputy MD of SBI

Correction

The article has been edited for a factual error. Former US president Richard Nixon abolished all notes in denominations of more than $100 in 1969, not 1960.

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