FM’s pushing too hard

Getting the Reserve Bank to act on issuing licences for private banks before the enabling legislation is in place is a dangerous step away from fiduciary principles. Besides, new licences will not help revive the economy.

At Bancon 2012 in Pune, the hyper-active Finance Minister P. Chidambaram once again urged the RBI to set norms for new private banks without waiting for the amendments to the Banking Regulation Act that would strengthen the central bank’s oversight powers.

“Let me emphasise”, he said, “the three powers that the RBI wants are already there in the regulation.” Incorporating those powers into the Act, he seemed to say, is a mere formality. Throwing RBI’s timeframe for the new banks back at the central bank, the FM noted that even if the RBI resumed the process of issuing guidelines for new bank licenses, it would still take 6-8 months for the new entities to begin operations. For Chidambaram, time, was of the essence.

Who should act first?

The RBI agrees it would take eight months for private banks to appear on the landscape. But it thinks some time would have been saved if the government had put in place the necessary amendment to the Banking Regulation Act, which requires Parliament’s approval.

As the RBI Governor D. Subbarao said, “We have been preparing for launching this process (of issuing new bank licences) but all the ground work, all the enabling conditions for launching this work have to be fulfilled.”

The FM would like the RBI to push ahead with the procedural guidelines and issue the licenses — all of which would involve a lag of eight months. Here’s why: “The occasion to invoke the extraordinary powers will not come just next day after the licences are granted. So, we must start the process of receiving the applications of new licences as soon as possible. I hope the Government’s well-positioned suggestion is taken up by the RBI.”

So far, the RBI has not been willing to trade its fiduciary responsibility for faith in ministerial assurances. Show us the amendments, formalise our powers in black and white and then six or eight months later, watch them sprout! That’s what the central bank appears to argue from its side of the table.

The FM wants the RBI to take the plunge, act! The RBI wants the FM to take the amendments to Parliament and…enact.

Confidence deficit

What we are witnessing here is a lack confidence on the part of the RBI and hectoring by the FM, attitudes that do not contribute to any meaningful discourse on the most important reforms for the Indian banking sector.

The FM is pushing, because no one else in the government entangled as it is in thickets of corruption, corroded by indecisiveness and futile bravado (think of Manish Tiwari challenging the CAG to a verbal duel), knows how to cut through to the clear light of a new dawn.

The Finance Minister believes that the best way to get there is for a few good men to take short cuts, Rambo-style.

The FM is working on the assumption that the best way to revive the economy is to open up more sources of capital for the ones who already have it. Private banks are erroneously being viewed as catalysts for an economy that is in fact suffering from mis-governance, not shortages of capital.

Instead of addressing that issue, the FM looks for quick fixes. The ONGC sale was mistimed, it would have flopped but for the “bail-out” by the LIC. The public sector entity was made to play white knight by raising its exposure limits to equity purchase from 10 per cent to 30 per cent, over the protests of the insurance regulator.

Not too long ago, nineteen Regional Rural Banks were merged into eight entities without consulting the RBI. The FM’s defended its action with the view that the RRB Act of 1976 did not specify any such consultation.

But the Act does mention that the RBI will represent the central government on the boards of the RRBs. So in fact, the RBI, along with the NABARD and State governments, does have a role to play in the destinies of the RRBs; all the more so when the health of the sponsoring banks being asked to merge the smaller entities falls under the purview of the central bank.

Fiduciary duty

The dangers implicit in the impatience of the FM with the RBI’s dogged insistence on its obligations to future depositors and clientele of the new banks can hardly be overstressed.

Asking the central bank to work on faith rather than fiduciary principles, on personal guarantees rather than legislated ones could push a fragile banking system already burdened with stressed assets into systemic risk-prone zones.

Perhaps, the RBI will agree and begin the norm-setting effort; but in doing so, it would be acting against its better instincts and its history as one of the most efficient regulators in the world.

If Indian banking, and along with them the vast number of depositors, escaped the worst horrors of the crises, credit must go to the RBI for its calibrated, cautious, perhaps plodding, management of India’s mincing steps towards globalisation.

Come to think of it, it’s unclear why the FM should be pushing so had for private banks at a time when credit demand is not growing, but stressed assets are increasing. Private banks are not the answer to the organised economy’s gloom and sliding performance indicators.

Fortifying government finances through divestments and forced purchases by government institutions is a backhanded way of raising money, but apart from the moral hazards implicit in its disregard of the industry regulator, the divestment effort could be viewed as innovative bookkeeping.

Getting the RBI to act on a promise and a prayer rather than according to its fiduciary duty is quite another matter. The origin of “fiduciary” lies in the Latin fides meaning faith and fiducia trust — but modern jurisprudence and commerce have invested those ethical terms with juridical tones that a legal-eagle like the Finance Minister must surely be aware of as he dons his political cap.

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