Three-year term too short for RBI governor: Rajan

Reserve Bank of India (RBI)  Governor Raghuram Rajan, whose three-year term comes to an end in nine weeks, on Thursday pitched for a longer tenure for the central bank chief, saying the global practice has to be emulated in India as well.

Rajan, who briefed Parliament’s Standing Committee of Finance on various aspects of economy and non-performing assets (NPAs) in banks, was asked by members on what should be the tenure of the RBI governor. He told the members that the existing three-year term is “short”.

While some MPs felt the governor was “diplomatic” in his replies, others found him “as confident as before”.

At a three-hour long meeting, Rajan was not only asked questions on banking but also about his family. One MP asked: “Is Mythili a south Indian name?” referring obliquely to an interview by his mother which somewhat revealed his political leanings as a student. Rajan replied with aplomb and serenity: “Yes, there are a lot of Mythilis in the south”.

There were only two Congress members in the meeting: Former Prime Minister Manmohan Singh and former law minister Veerappa Moily. Rajan is considered a protégé of Singh, who spotted his talent and invited him to India, first as chief economic advisor and then as RBI governor. However, during Thursday’s meeting, Singh didn’t ask Rajan a single question.

It fell on others to ask Rajan how long should the tenure for RBI governor last. Three years is too short, said Rajan. The US Federal Reserve keeps its chief on for four years. Many countries have a five-year term for their central bank chiefs.

However, the RBI Governor played a straight bat and didn’t blame any individual or group on controversial questions. He said, while there was palpable credit growth in private banks, lending by Public Sector Banks (PSBs) was declining and was virtually zero in sectors like agriculture (including non-food), small enterprises and even education. He said high interest rates were not the reason for this because private sector lending was highest in the housing sector where interest rates were high.

When members of Parliament asked for the reason, Rajan explained that PSBs were not lending because they were afraid of adding to their already high bad loans.

A series of steps have been taken to help PSBs clean their balance sheets. The government not only released guidelines for banks to differentiate between a defaulter and a wilful defaulter, but also asked for naming and shaming of the wilful defaulters. The new bankruptcy and insolvency laws are also likely to help in this regard.

When asked, how PSBs could grant loans to companies that were several times more than their net worth, Rajan said, banks take risk. He recommended that if the boards running banks were made effective, such risk-taking could be prevented. Rajan, however, stopped short of pointing out that the Ministry of Finance appointed directors on bank boards. One issue where Rajan was most forthcoming was the manner in which big defaulters could escape. He said there were double standards in dealing with big corporate defaulters and common people who could not pay back their loans. Bigger companies got away just because they had the capacity to hire senior lawyers, the Governor said.

Rajan was also asked whether it was the RBI’s idea to merge small banks with the bigger ones. This issue was not a part of the background note that was circulated to MPs.

On this, Rajan chose his words carefully: In my opinion, balance sheets should be cleaned up by the banks before they are merged, he said. Rajan referred questions relating to Mudra Bank and ministry of micro small and medium enterprises (MSMEs) to Deputy Governor S S Mundra.