Hot seat

The first board meeting of the Reserve Bank of India under its newly appointed governor seems to have steered clear of controversial issues that saw its previous chief leave before the end of his term. The bland press release put out by the RBI after the event makes no mention of any debate on providing liquidity to NBFCs, easing Prompt Corrective Action (PCA) norms or the RBI’s economic capital framework, issues which its board members had pursued with such a sense of urgency in the previous meeting. It instead talks of new deliberations on the bank’s governance framework. But now that the above points of disagreement between the RBI and the government have been raked up, it is best that they are resolved, rather than swept under the carpet.

In pressuring the RBI to rethink or dilute its PCA framework for public sector banks, the Centre and its board representatives simply need to back off. Bank credit growth in the year ended October 2018 stood at a healthy 13 per cent, doubling from the previous year, showing that the 11 banks under PCA haven’t posed a serious impediment to credit flow. It is also a misconception that banks under PCA are completely barred from lending by the RBI; they are only subject to tighter norms on lending to riskier borrowers. Decisions on PCA norms are now best left to the Board for Financial Supervision which is examining this issue. There’s no point in harping on liquidity to NBFCs either, as the markets seem to have already sorted out this issue by marking up borrowing costs for the riskier NBFCs. The issue of what level of revaluation or contingency reserves the RBI needs to hold to be deemed adequate, is a critical one though. It must be taken up by a non-partisan committee which lays down definitive rules. If it is found to carry excess capital, it would be desirable to specify end-use criteria such as bank recapitalisation, instead of simply ploughing it into the general budget. Whether Governor Shaktikanta Das manages to convince the Centre’s vocal board representatives of these points in the coming days will be the true test of his ability to uphold the RBI’s credibility and autonomy.

It is unclear what changes the Centre is seeking in the RBI’s governance framework and why it wants to make them. If it is keen to make RBI more accountable to its board, the board’s composition will need a thorough overhaul first as members with political or industry affiliations may carry conflicts with public interest. The point that the RBI, as a regulator with a far wider suite of powers than most other central banks, needs to be more open and accountable on its decisions, to the public and the legislature, is well-taken. Putting RBI officials through their paces in their parliamentary panel depositions should be sufficient to ensure the first, and a more communicative person in the governor’s chair should hopefully take care of the second.

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