A defining feature of US President Donald Trump’s approach to any issue — be it related to economy or foreign policy — is complete unorthodoxy. Whether it is the policy stand itself or the message, medium, language, venue or setting in which his views and decisions are pronounced, the approach is completely antithetical to the conventional ways of doing things. The final effects of this unorthodox approach can be known only in due course — particularly with regard to Trump’s approach on economic issues that had long confronted earlier US administrations.

It follows quite reasonably that when the approach is completely orthodox and unchanged from the past, the outcomes will also be in line with the past. Such a denouement seems to await the Indian approach to some key economic policy issues. One wonders if India should also adopt an unorthodox approach, a la Trump, in order to induce materially different outcomes. Indeed, in the backdrop of what seems a secular economic downtrend, one would have thought unorthodoxy is clearly called for.

We shall take up two policy issues here, regarding which the current approach is no different from that followed or attempted in the past 30 years.

One is the merger of public sector banks, to create what policymakers call as a few banks big enough to do big ticket (lending) business and compete on a global scale too.

Another is the transfer of dividends and “redundant” reserves from the Reserve Bank of India’s balance sheet to the government.

Bank mergers

Public sector bank mergers were actively advocated right through the 15 years to 2015 – in fact, right from the first Narasimham Panel report of the mid-1990s. The number of banks, though, broadly remained the same as progress beyond advocacy was not possible for many reasons.

Now, even without the creation of a few big banks, we have had a historic build-up of bad loans (primarily large industrial and commercial loans) in the past 15 years, which are unravelling now.

Wouldn’t bigger banks create a bigger credit blow-up? Given that, one wonders why policy-makers continue to emphasise that bigger banks are a crying need for India.

Change in approach

A Trump-like approach here would have been radically different. Instead of shrinking the number of banks, unorthodoxy would have called for the breaking up of each of the public sector banks into many smaller banks. For example, a bank with a balance sheet of say ₹1,50,000 crore could be broken up into five banks of around ₹30,000 crore each. If carried to its logical conclusion, we could see the creation of at least 150-200 banks in the country.

Now, the question is does India need that many banks?

— Absolutely, in fact it needs even more banks. That is quite clear from an RBI committee report itself. In January 2014, the Nachiket Mor report pointed out that on both financial inclusion (spread of financial institutions and services across the country) and financial depth (percentage of credit to GDP at various economic levels), the overall situation was very poor. Close to 90 per cent of small businesses (the MSME sector) have no links with formal financial institutions and 60 per cent of the rural/urban population do not have even a functional bank account. The credit to GDP ratio was terribly skewed, with large parts of the country not figuring at all in the picture. One can reasonably say these statistics would not have changed notably in the last five years.

Indeed, it was based on this report that a few small finance banks (SFBs) focussed primarily on the MSME sector and low income households have been licensed in the recent past. That move was quite unorthodox, given the history of bank licensing, and so would have been the way to go.

Questions will arise about whether India has the regulatory and supervisory bandwidth and institutions to handle a large number of banks spread across the country. That again would call for unorthodox solutions.

Why can’t India think in terms of substantially decentralised supervision (if not regulation) of financial institutions — like in the US? There are about 5,000 community banks, and hundreds of state and nationally chartered banks, credit unions in the US. Regulation and supervision is consequently decentralised to suit the structure of the banking industry.

To be sure, substantially decentralised supervision of banks would be a metamorphosis in India, calling for large-scale legal changes and capacity build-up. But, it would truly be an unorthodox move. Incidentally, such unorthodoxy could also be a catalyst for a credible bond market for wholesale (industrial) financing.

Dividend and ‘reserves’ transfer

The RBI’s dividend and reserves transfer is another “unchanged” issue from the past. One has to note that the RBI’s incomes/dividends and reserves will grow only if its balance sheet expands.

Shorn of all jargon, there is no technical difference between the RBI’s balance sheet expanding by relentless acquisition of ad hoc treasury bills (a defining feature of RBI-government financial relations in the three decades prior to 1995) and relentless acquisition of government securities/foreign exchange. The result of such relentless RBI balance sheet expansion: Skewed distribution of the broad money aggregates and illiquid bond and forex markets.

Unorthodoxy, which can spur the development of local bond and forex markets and risk management capabilities in our corporate sector, is required here as well.

The writer is a Chennai-based financial consultant

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