“One of our attempts here is to make sure that the system is evenhanded, that the large guy also repays, or if he or she cannot repay, that the debtholders have strong recovery rights,” Rajan said in an interview to The New York Times. “Now that’s work in progress. But it is extremely important to make the system legitimate.”
Gross non-performing assets of Indian banks are close to Rs 2.70 lakh crore. The total stressed assets including restructured loans amount to 10 per cent of the advance. “And that (recovery) has been one of the big focuses of the last few months: How do we get the big promoter to absorb the losses and not shove it onto the banks? And how do we make sure that the system works for everybody in the same way?” he asked.
“One of the worries about capitalism is ‘heads the capitalist wins, and tails the system loses, but the capitalist is OK all the time.’ To get a proper capitalist — or I should rather say, free enterprise — system in this country, we certainly need people to have the ability to take risk,” Rajan said.
But if they do take the risk, they should pay the costs of taking that risk, rather than benefit when that risk pays off, “but shove the cost on somebody else when it doesn’t,” he added.
Rajan said that “he was not feeling pressure to change the direction of monetary policy”. He described a harmonious working relationship with Modi’s top economic policy makers. “We completely understand each other,” he told NYT.
Rajan defended his decision not to lower interest rates at his last monetary policy review on December 2. While oil prices had already fallen considerably by then, he said there was no way to foresee the abrupt plunge that followed, or to pass judgment on how long prices would stay low.
On the need for greater coordination by central banks and restraint in quantitative easing, “my sense is that industrial countries are looking inwards so much that expecting international cooperation for anything other than the crisis of the day is probably wishful thinking. See, these are all attempts to — what’s the right word — to sensitise thinking. And I think that the speech had that effect.”
“In fact, many people have come around to the point of the speech that additional QE is largely about exchange rates … than really energising a lot of domestic activity. I think that is now a much more widely held view than when I started talking about it,” he said.
“But the point, I think, is that it had had the benefit of at least making people aware that when the time comes, when sort of market volatility creates the crisis somewhere, that there is a need for the international system to come together to fix it,” he said. “You know, I was hoping we would put in place a system anticipating crisis, but if it is post-crisis, at least making sure we can pick up the pieces reasonably efficiently.”
On his worry that central banks have gone too far in cushioning shocks in financial markets, he said, ‘Effectively, every time prices move considerably, some central bank says, ‘Wait a minute, wait a minute, I’m going to give you some fresh liquidity,’ and we essentially offer a put option to the markets. So it’s not a Bernanke put or the Greenspan put. Now it’s the universal central bank put. Have we, in an attempt to banish volatility — which wasn’t, I think a direct objective of any central bank, but indirectly, we’ve … created the danger of much more volatility.”