Has the RBI failed in Lining-up the Banking Reforms? A few questions for the Central Bank from a top banker

RBI failed in doing this by giving a body blow to commercial banks and instructing them to identify bad loans with immediate effect and not in a phased manner

Reserve Bank of India’s (RBI) top brass comprises of persons with the outstanding calibre, and they should know even more than ordinary citizens that their public statements can make or break the economy of the country. Still, we are not to forget that reasonable dissent must be allowed to uphold the integrity of our institutions. In this light, hereunder are some questions that seek answers from RBI.

First, let’s talk about non-performing assets (NPAs) and the 2016 initiative of the central bank mandating strict provisions for stressed assets. NPAs are a common phenomenon in any economy since not all borrowers can service loans in a time-bound manner owing to many reasons which can be within (bad management decisions or embezzlement of borrowed funds) or beyond their control (unfavourable market conditions or sudden change in government policies). Prudently tackling with NPAs involves identifying stressed assets in such a manner that they do not adversely affect future lending operations of banks.

What about RBI’s deliveries in its present functions? Now that everyone is discussing and finding faults in the IL&FS episode, barely is anyone trying to reach to the bottom of the issue. Credit rating agencies (CRAs) of India had until recently shied away from flagging IL&FS and downgrading it despite the financial mess that was growing within due to asset-liability mismatch

RBI failed in doing this by giving a body blow to commercial banks and instructing them to identify bad loans with immediate effect and not in a phased manner. Imagine, the dust that was being continually brushed under the carpet was taken out all of a sudden and banks were ruthlessly asked to clear the mess immediately.

Making of the Crisis

What happened was almost all public sector banks posting unprecedented losses and a double whammy of lost confidence in banking institutions (that otherwise would have made dividend payments to support GoI’s expenditures) and curb in lending activities. The government had to step in and earmark budgetary resources (which otherwise would have been used to fund infrastructure growth, thereby creating jobs) to recapitalise banks. The question is why RBI recklessly pursued bad asset recognition exercise rather than undertaking it in a time-bound manner?

Second, let’s talk about regulation of RBI over banking institutions. RBI seeks greater autonomy in this respect but is the current framework so bad? RBI conducts Annual Financial Inspection (AFI) of commercial banks where the central bank assesses many aspects including loan books and financial health of banks. In the year 2016, RBI took a sudden, rather knee-jerking decision, of increasing the sample size that it analyses and unearthed many skeletons in loan books that had hitherto remained hidden. Loans that were extended without proper due diligence and were on the cusp of turning bad should have been noticed by RBI prior to 2016 during its AFI exercise.

However, this never happened. Moreover, while the central bank enjoys vast powers concerning private banks- where it can remove CMDs, call a meeting of Board, appoint observers and remove managerial brass- it failed to rein them in, and it was only after the Asset Quality Review exercise that lenders such as ICICI Bank abruptly recognised stressed assets. The question is why RBI did not tough act before 2016, and properly conduct AFI?

Third, RBI has openly voiced its concern over establishing a separate regulator for payments as suggested by the government. RBI’s rationale is that since all digital payments have an underlying bank account and banks are regulated by it; there exists no need for a separate regulator as it would result in overlapping jurisdiction and synergy would be compromised. Although the data isn’t available on how many digital transactions fail on a daily basis, for example when a person uses the UPI interface to transfer money from one bank account to another, one can easily guess that the number is substantial. RBI, the institution that oversees functioning of banks, has a mandate to keep inflationary forces under control and undertake various measures like open market operations (OMO) to infuse/ curb liquidity and sell/ purchase dollars to manage rupee exchange rate, cannot be expected to handle payment ecosystem, thereby justifying the need for a separate regulator. The question is why the central bank wants to hold on to power?

Fourth, what about RBI’s deliveries in its present functions? Now that everyone is discussing and finding faults in the IL&FS episode, barely is anyone trying to reach to the bottom of the issue. Credit rating agencies (CRAs) of India had until recently shied away from flagging IL&FS and downgrading it despite the financial mess that was growing within due to asset-liability mismatch. Although CRAs are regulated by Securities and Exchange Board of India (SEBI), they are also accredited by RBI to undertake rating exercises for large loans, commercial papers and Letter of Credit. It was only in July this year that RBI contemplated undertaking a joint audit of CRAs along with SEBI. The damage, however, was already done. IL&FS, which enjoyed debt rating of highest standards, defaulted on its obligations and the ripple effect was felt across the sector. In a flash, almost every NBFC stock headed south owing to liquidity crunch in the sector. The question is why RBI did not rein in CRAs proactively?

It is easy to criticize the ruling Government than to admit own blunders. And RBI chose the former to take the spotlight away from its own failures as listed above. Indeed, the central bank deserves its share of autonomy to maintain the health of India’s banking sector and undertake timely remedial actions in cases of divergence. However, the wise men of RBI cannot stand vindicated when they openly blame the government of the day without any rationales whatsoever. Foreign investors are already pulling money out of emerging economies due to rising interest rates in the United States; hence a public rift between the government and country’s central bank will only further erode confidence. At a time when the country desperately needs investment for infrastructure growth and to create jobs, the RBI’s dissent is an unjustifiable endeavor. Setting own house in order ought to be the priority of RBI.

(The writer is an ex-Director of PNB & Dena Bank)

(The article Has the RBI failed in Lining-up the Banking Reforms? A few questions for the Central Bank from a top banker is published in ‘Organiser’ )

81 thoughts on “Has the RBI failed in Lining-up the Banking Reforms? A few questions for the Central Bank from a top banker

  1. Venkat Pulsani

    The last year of BJP rule has been tumultuous. Oil prices have regained strength and rupee is sliding like never before. Now RBI-government tussle is driving away foreign investors. 2019 will be interesting.

    Reply
  2. karthik sasupalli

    During UPA 1 and 2, Indian banks were lending without proper due diligence to corporates. Why was RBI sleeping then and did not find this out in their annual assessment of banks? Answer this question.

    Reply
  3. hardik patira

    For Raghuram Rajan there was pressure from outside the organisation but now the pressure is from within after BJP appointed an RSS economist on board of RBI. They are hijacking all institutions.

    Reply
  4. Pankaj Kumar

    It is absolutely true that India needs a separate regulator for payments. RBI deals with inflation and setting repo rates so they cannot do all work by themselves. A different agency is much needed.

    Reply
  5. Girish Aghera

    Look at IMF that has warned India over violating the independence of Reserve Bank. They all have foreign interests and want the Indian economy to break to benefit other manufacturers in the West.

    Reply
  6. Sarvesh Chandran

    This time even Subramanian Swami has sided with RBI. He is the same man who was against Raghuram Rajan as RBI chief. Autonomy of central bank cannot be compromised at any cost.

    Reply
  7. Lohit Chandran

    Liquidity after IL&FS debt default has dipped since banks are not ready to lend to NBFCs and HFCs. Why can’t RBI earmark some liquidity for NBFCs like they did during the 2008 financial crisis?

    Reply
  8. Irfan Fazli

    IL&FS default has indirectly hurt banks such as SBI which are shareholders in the company. Government should consider punishing the responsible managerial persons of IL&FS.

    Reply
  9. Ankush Agarwal

    Everyone knows how bad is the health of Indian banking system and this is because RBI did not notice bad signs proactively. Now they have suddenly started cleaning up the mess but at the expense of growth.

    Reply
  10. Jitin Sharma

    Modi government should realise that the rift between RBI and them is hurting investment and Indian currency. In its quest to usurp all public offices, BJP is compromising with economy.

    Reply
  11. Tushar Patel

    Rarely do I come across a blog that is both educative and amusing, and without a doubt,?you?ve hit the nail on the head.

    Reply
  12. Saiteja Peddinti

    it is an amazing piece of writing designed for all the online visitors. they will get benefit from it I am sure.

    Reply
  13. vineela narayanan

    I started to read your article and it caught me to the extent that I could not put it down. Amazing piece.

    Reply
  14. Probuddha Nag

    I just want to mention I am all new to weblog and truly savored this blog site. Likely I want to bookmark your blog . You actually have terrific articles. With thanks for sharing with us your web site.

    Reply
  15. Sourabh Roddey

    Great blog you have got here.. it is difficult to find high quality writing like yours these days. I truly appreciate people like you. Take care..

    Reply
  16. Kuldeep Sharma

    I visit daily a few web sites and sites to read articles or reviews, however this blog provides feature based articles.

    Reply
  17. Vijay pawar

    If some one wishes to be updated with most recent technologies therefore he must be pay a quick visit this site and be up to date all the time.

    Reply
  18. sanghani vinodbhai

    Quality posts is the important to be a focus for the people to visit the web page, that is what this web site is providing.

    Reply
  19. Abhishek Roy

    Hi, I do believe this is an excellent web site. I stumbledupon it. Money and freedom is the best way to change, may you be rich and continue to help others.

    Reply
  20. Riddhiman Medhi

    It is hard to find experienced people for this subject,?but you seem like you know what you are talking about.

    Reply
  21. Vasishta Haridwari

    Way cool. Some extremely valid points. I appreciate you penning this post and the rest of the website is really good.

    Reply
  22. Bhavesh Bansal

    I am genuinely glad to glance at this webpage posts which consists of tons of useful facts, thanks for providing such statistics.

    Reply
  23. shyam kumar

    My family always say that I am killing my time here at net, however I know I am getting know-how all the time by reading such good articles.

    Reply
  24. Rikhav Mehta

    I have learn several just right stuff here. Certainly price bookmarking for revisiting. I wonder how much effort you set to create such a fantastic informative web site.

    Reply
  25. aman goyal

    I need to to thank you for this wonderful read.. I certainly loved every little bit of it. I have got you book-marked to look at new stuff you post?

    Reply
  26. Nallasivan Verma

    I wish to state my complements to the hard work you have done to incorporate so much of detail about every information.

    Reply
  27. Vivak Jain

    These are in fact enormous ideas in concerning blogging. You have touched some nice things here. Any way keep up writing.

    Reply
  28. vinay rawat

    The website is bright, clean, quick, easily navigable and all the links seem to work well. Moreover, the contents here in blog shape is really wonderful.

    Reply
  29. Aayush Gandhi

    The next time I read a blog, I hope that it does not fail me as much as this one. After all, I know it was my choice to read, nonetheless I actually thought you would probably have something helpful to talk about. All I hear is a bunch of whining about something that you could fix if you weren?t too busy seeking attention.

    Reply
  30. Abha tiwari

    Thank you for some other magnificent post. Where else could anybody get that kind of information in such a perfect manner of writing. I have a presentation subsequent week, and I am on the look for such information.

    Reply
  31. Prasad Nuka

    I have read so many posts about the blogger lovers however this paragraph is in fact a fastidious paragraph, keep it up.

    Reply
  32. Robin George

    Really.. thanks for starting this up. This web site is one thing that is required on the web, someone with a bit of originality.

    Reply
  33. Azhar Kottaparambil

    You definitely put a fresh spin on a subject that is been discussed for years. Wonderful stuff, just excellent.

    Reply
  34. pavan joshi

    Thank you for the introduction to the new website. I will be re-visiting it many times, but on a fast run-through it looks really great.

    Reply
  35. Mithilesh Gour

    So good to find somebody with some unique thoughts on this subject matter. Really.. thanks for starting this up.

    Reply
  36. Somak Mitra

    I appreciate you finding the time and effort to put this information together. I once again find myself personally spending a significant amount of time both reading and commenting.

    Reply
  37. Abhimanyu Yadav

    Hi there to every one, since I am really eager of reading this weblogs post to be updated daily. It contains fastidious stuff.

    Reply
  38. Nubin Stanley

    It is always exciting to read through articles from other authors and?use a little something from other sites.

    Reply
  39. Rahul rai

    This is undoubtedly the most clean and clear form of writing that have seen so far. Congrats to attain this level.

    Reply
  40. Rohan Singh

    Spot on with this write-up, I absolutely believe that this amazing site needs much more attention. I will probably be returning to read through more, thanks for the advice.

    Reply

Leave a Reply to Saurabh Agarwal Cancel reply

Your email address will not be published. Required fields are marked *