Much has been written about the stand-off between the North Block and Mint Street. The recent, strongly worded lecture by Reserve Bank of India (RBI) deputy Governor Viral Acharya is perhaps the outcome of the exasperation and frustration felt by the RBI over the hurdles placed in carrying out the functions remitted to it.
Admittedly, there have been simmering differences between the government and the RBI for long. The main issues of disagreement relate to the easing of Prompt Corrective Action (PCA) norms to enable banks to lend to MSMEs and providing a special liquidity window for non-banking financial companies (NBFC), particularly in the aftermath of the IL&FS crisis. There are also differences over the amount of reserves to be transferred to the Centre, concerns about the RBI’s February 12 circular and the proposal for a new payment regulator.
Much of the discussion so far has not touched upon three inherent aspects of the disagreement. The first has to deal with basic conflict of interest. The government is the owner of the banks and it is asking the regulator to relax regulations. In fact, the RBI Governor had expressed his frustration on the asymmetry in regulation between public and private sector banks. By asking the RBI to change the regulatory paradigm, the dangers of conflict of interest have become even more glaring. Apart from infusing some money to recapitalise these beleaguered banks, the government has done nothing to reform them, be it by reducing ownership or injecting professionalism.
The second issue missed in the discussions is: who is responsible for creating the present situation? If the exuberance and excessive borrowing of businesses in 2005-08, even for unviable projects, the political influence in lending decisions, cancellation of coal mining licences resulting in large scale problems for power and steel companies were not enough, we had the demonetisation misadventure and a poorly designed GST, which not only created problems for corporates and banks but also to the small scale sector. To cap it all, the Prime Minister comes up with a scheme of lending to MSMEs within an hour. Governments mess up the financial sector for their electoral gains, refuse to undertake the much needed reform and, as owners of these banks, ask the regulator to relax regulations!
Third, in their clamour for relaxing the PCA framework, nobody wants to spare a thought for the depositors. To be sure, deposit insurance is only up to `1 lakh and the PCA framework is mainly to protect the interest of the depositors by restricting banks from lending, inter-bank borrowing and promoting prudence in management. Indeed, the government finds it irritating, but the regulator has to protect the voiceless depositor.
Interestingly, some have argued that the government has the electoral accountability whereas non-elected institutions like RBI are not accountable to the people. Unfortunately, benevolent governments do not exist and elections are not fought on policy issues. When the markets fail, governments intervene. But, when governments fail, it is institutions like RBI that have to come to the rescue. .
(The author was a member, 14th Finance Commission, and is presently a Counsellor, Takshashila Institution. Views expressed are personal.)