 "Urjit Patel and Raghuram Rajan")
Raghuram Rajan and Urjit Patel served a combined term of five years as Governors of the Reserve Bank of India. A Governor at Mint Road can enjoy a five-year term as per Section 8(4) of the RBI Act. It is what their predecessors, D Subba Rao and Y V Reddy, got individually. Of the five years the two shared, Rajan had three years and Patel even less at two years and two months.
So should the Rajan and Patel terms at RBI be assessed as a continuation or did one impact RBI more than the other? Amartya Lahiri, Director of the Centre for Advanced Financial Research and Learning (an institution promoted by RBI) feels it makes sense to see their term as a continuum. “I sense they were playing off the same playbook. They had different styles but their game on NPA was similar.”
To break down the two governorships, a useful beginning is provided by Rajan himself. Early in his term, in November 2013, he classified the tasks ahead as five pillars “around which our reform efforts were structured”. These can be labelled as:
- Monetary policy framework
- Ushering in competition among banks
- Corporate and banking distress (NPA)
- Reforms in the financial markets
- Access to credit by MSMEs and technological changes
It is clear Rajan spent a lot of his time developing the first two pillars. Patel, by contrast, has spent spent more energy on NPA and some on the technological changes (payments regulations). Credit for MSMEs and reforms in financial markets are still up in the air and, in fact, differences on the former are reported to be one of the reasons that cost Patel his job, though it may be a rebound from the NPA clean up too.
There is no doubt that through the five-pillar approach, Rajan laid out a visionary path for RBI to act upon when he entered the office in September 2013. As subsequent events show, the template has held steady for five years to evaluate the performance of the governors and we intend to use it here too.
Monetary Policy: Rajan, as he himself noted, became the last RBI Governor to set the interest rates for the economy, going sole. He worked with the government to establish the Monetary Policy Committee (MPC) through an amendment to the RBI Act. The six members to the committee were finally appointed after Rajan left office in September 2016. To set the deck for it, in 2013, he had appointed a group under Patel to establish the basis of the MPC -- an “expert committee to revise and strengthen the monetary policy framework”. Patel’s work gave Rajan the theoretical support to establish that it is inflation which RBI must keep under control. Patel, as governor, institutionalised the role of MPC and made clear that the system is here to stay. Not only that he issued the subsidiary regulations for MPC including a generous financial incentive for the members. The style of an intensive two day meeting of the MPC is also his contribution to the process.
To make the RBI stick to the knitting of inflation targeting, Rajan waged several high-profile battles, including the need to check “unwarranted” rise in rural wages by stamping out food inflation. Speaking on why farmers needed low inflation, he notes: “This was an extremely important point to make to the then governing UPA regime, which had a constituency that believed significantly higher food prices were in the farmers’ interest.” The debate has not ended.
Competition among banks: Rajan opened the tap for new banks to again come into the markets. The last set of licenses was given in 2001 to two banks. And while he could offer the universal bank license to only two entities from among the 26 that applied, it was a clear indication of where he wanted to lead the sector to. In hindsight, he was quite right: “At any rate, knowing that there was little appetite in either the UPA government or the NDA government for the liberal agenda, wholesale privatisation was off the table. Within the parameters set by the government, the RBI had to do the best job it could in reforming the banking sector,” he has written later. Since public sector banks wouldn't be privatised, the logical thing to do would be to bring in more private entities to deepen competition, was his approach. He was a bit more successful with the other two forms of bank licenses, small finance banks and payments banks.
By 2016, RBI had moved to make bank licenses available on tap. It is a different matter that no one has come to this window since then, with the minimum needed purse of at least Rs 5 billion.
But on governance of banks, Rajan did not get to move ahead. For instance, he wanted RBI representation on state-run bank boards to be withdrawn. Rajan noted, “We will have moved significantly towards limiting interference in public sector banks when the Department of Financial Services (which oversees public sector financial firms) is finally closed down, and its banking functions taken over by bank boards and the Bank Board Bureau.” It did not happen under his watch. Rajan discussed it with the finance minister, Patel put it in writing.
Patel has taken the battle for governance of banks to the finance ministry. While he let the Bank Boards Bureau become almost redundant, he made clear his opinion. "The market discipline mechanism for public sector banks is appreciably weaker compared to that at private banks...From the RBI’s standpoint, legislative changes to the BR Act that make our banking regulatory powers fully ownership neutral – not piecemeal, but fully – is a minimum requirement." It didn't go down well with GOI at all with finance minister Arun Jaitley having had to argue out the case. It has a bearing on the most difficult pillar of reform, that of NPAs.
Yet it is true that while no heads at the top have rolled at any of the state owned banks, Patel got the chiefs of three private sector banks — Axis Bank, ICICI Bank and Yes Bank — removed within a year. This is what set the stage for the most difficult reform of all, that of NPAs.
NPAs: In his memoir, I do What I do, Rajan has acknowledged this is where he recorded the “least progress”. Yet he did have an ammunition which he did not fire. Patel took up the responsibility to deploy it. This is the Prompt Corrective Action framework that has put 11 banks figuratively in the ICU. It was available to Rajan as it was introduced in the RBI arsenal as early as 2002, but till Patel issued the revised plan in April 2017, it remained only in the books.
To use the cliche taking the bull by its horns, it is definitely Patel who brought urgency to the business of repairing NPAs. If one sees Rajan’s interventions in different sectors chronologically, it is obvious that he began to lean into the NPA problems only after the Asset Quality Review (AQR) results were made available from October 2015. And even then, nothing compares with the February 12, 2018 circular from RBI under Patel, which made it mandatory for banks to recognise stress with even a single day’s delay in servicing a loan. It scrapped all the past restructuring mechanisms, including those launched by Rajan and said insolvency resolution under the Bankruptcy Code would begin if a borrower failed to pay even at the end of the 180 days of first default. He refused to buckle under and modify it, despite the public prod by the finance ministry and more than one Parliamentary panel.
To Rajan’ credit, two of his initiatives, however, have formed the basis of the war on NPAs. Asset Quality Review (AQR), implemented in 2015, two years after he was in the saddle, began to throw up the horrifying numbers of NPAs. The other was the large loan data base, CRILC (Central Repository of Information on Large Credits). As Rajan himself notes, “The important duty of the regulator is to force timely recognition of NPAs and their disclosure when they happen.”
Financial markets: This is something on which Rajan made some major moves, though progress was often limited because of conflicting demands from a government concerned about keeping domestic inflation low, meeting fiscal deficit targets and trying to shore up the rupee. A key change Rajan supported was the government’s decision to remove management of public debt from RBI as part of measures to deepen the bond market.
He also finally brought the corporate debt market to life, creating an alternative for companies to borrow from sources other than banks. Here again, while the central bank discussed changes in the RBI Act to conduct repos of corporate bonds under Rajan, it was Patel who got some traction there, with BSE and NSE launching the electronic market for them this year. Banks were permitted to hold a “moderate open position” in the forex market, but he stamped down on demands to trade in domestically issued securities abroad. He however allowed the development of the Masala Bonds market abroad as part of a strategy to “build out an international quasi-sovereign rupee yield curve, so that rupee issuances can be priced easily.”
As Rajat Kathuria, director and chief executive, Icrier puts it, Rajan’s big achievement was to steer India out of the taper tantrums that had threatened to become almost as big a challenge as the balance of payments crisis of 1991. But then, Patel inherited the challenge of an economy hit by demonetisation. It is often difficult to separate the two terms, except that Rajan was eloquent. Patel was not.
