RBI governor Raghuram Rajan is always in the news for his views on Indian economy, industry, global economy – among a whole host of issues. Recently while delivering the YB Chavan Memorial Lecture at Mantralaya, Rajan pitched for lowering of home prices and facilitating easy exit for startups.
Rajan also urged bureaucrats to function for a day without their assistants. This he said would help babus understand the problems of the ‘aam aadmi’. We take a look at five pieces of advice and revolutionary mantras from Raghuram Rajan:
To real estate developers – Reduce home prices: Having cut interest rates, Rajan is now putting the onus on real estate developers, asking them to reduce prices to encourage more people to buy properties.
“I am hopeful that as interest rates come down, there will be more credit and buying. And I am also hopeful that prices adjust in a way that encourage people to buy,” Rajan said. “My sense is that there is a little bit of everything that needs to happen” for the revival in the real estate sector, Rajan added.
“There is an issue of how they (consumers) see the housing market and how they see prices. There has to be an adjustment so that more people want to go and buy,” he noted.
According to Rajan, apart from interest rates, measures such as including affordable housing loans under the priority sector lending requirements makes him confident to say that worries on the financing side are taken care of.
When it comes to finance to developers, Rajan pitched for more transparency on the borrower’s side. “We need action on real side (as) also on transparency on land acquisition, on transparency on construction and on sales,” he emphasised.
Further, Rajan said more transparency in such matters would enable financiers to better track flow of funds, which project was being funded by who and who all were the other financiers. Construction of every kind, including houses and roads, is a big source of growth especially for a developing economy like ours, he added.
To bureaucrats – Understand ‘aam aadmi’: Asking bureaucrats to function for a day without their assistants, Rajan said it will sensitise them to the travails of ‘Aam Aadmi’ and help in better discharge of their duties.
The outspoken Governor said he wants to introduce a similar system for senior officials at RBI as well wherein they can be asked to discharge some simple banking duties to make them understand difficulties faced by others.
“One could, as senior officials, try to spend a day doing some task which they ask their assistants to do but without revealing who they are and getting the assistance,” Rajan said.
“Perhaps, then we will have a much better sense of what Aam Aadmi faces and a much greater sympathy for changing the system than we have otherwise,” he said.
Rajan said he is mulling introducing the system within RBI where senior officials will be tasked to do simple things like changing the nominee of a fixed deposit account, which shall make them learn about the difficulties.
To e-commerce companies – Warns against deep discount model: With concerns being raised about cash-burn in burgeoning e-commerce sector, Rajan made it clear that getting revenues through deep discounting is not a viable business model for startups.
“If the only reason you are getting revenues, not profit, is because you are selling based on 50 per cent discount, it can’t be viable in the long run,” he said.
He was quick to acknowledge that many businesses are in different stages of their life-cycle with some trying to establish the viability.
“All these businesses are trying to establish viability, some are still being financed in a big way,” he said, adding that it is natural for some of them not to work which will lead to shutting down the business.
For startups – wants exit policies to be easier: Many startups depend on capital injections from venture capital funds and some have closed down recently.
“I think this (shut down) is a natural process and we should not stand in the way and lament too much,” Rajan said, making a strong case for policies which will make it easier for startups to exit so that resources can be used productively.
Given the competitive nature of things, it is also essential to have safety covers including health insurance, unemployment insurance and pensions, he said, adding that such nets can ensure “social peace”.
He said the conditions for starting up are improving by the day on the back of interventions by the government and regulators which have upped the infrastructure and logistics support.
However, there is a lot which needs to be done, he said, flagging skilled talent as a key prerequisite for the country. There are many other soon to be introduced aspects which will help the startup ecosystem, Rajan said, pointing out to Bankruptcy Code which he expects to be introduced in the current session of the Parliament, and also the introduction of the Small Finance Banks.
He also said that the bankers while dealing with stressed loans with small businesses should also understand that the smaller firms do not have the same mettle to take every case to a court as a big business does.
“I said easy exit (for startups) but it should not be unfair exit. With respect to small firms, creditors often have draconian powers which large firms can limit in courts. Something like Sarfaesi. A large firm has a better way of dealing with it in the court than a small firm has.
“The banker may have much more power over the small firm with Sarfaesi than it has over large firms. Because we want to get the money back from the large firms, we continue to make the power harder. So, we have to be a little careful. Balance it out. The small firm should not be put out of business too fast while large firms stay in business too long simply because the large firm has easier access to good lawyers.
Mantra for revolution in banking space: Capital Small Finance Bank (CSFB) has started operations after getting the licence, kicking off the era of differentiated banking in the country. “My sense is, this is going to create a revolution in the banking sphere. And a revolution in the banking sphere will create easier access to finance for small entities,” Rajan said.
CSFB, earlier known as Capital Local Area Bank, was given the licence recently. It became the first Small Finance Bank and the second differentiated bank after Bharti Airtel’s Payment Bank to get the final go-ahead.
The governor said he expects each of these banks to start with a higher-than-required capital of Rs 500-600 crore, which will entail having an asset book of up to Rs 6,000 crore and stressed that these will not be “tiny banks”.