PSBs should have an arm’s length relationship with the govt: Thomas Richardson

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Published: August 1, 2015 12:45:31 AM

It is good the govt and RBI are not taking the easy road by encouraging large loan write-offs in the hope that growth will pick up

Having watched the end of the UPA regime and the beginning of the Modi government as the International Monetary Fund’s (IMF) senior resident representative in India since August 2012, Thomas Richardson says he sees a fair amount of consensus on the major policy changes needed to reduce poverty and provide jobs. Despite the ongoing logjam in Parliament threatening to delay crucial reforms such as the Goods and Services Tax (GST) and easier land acquisition for industry and infrastructure, Richardson, who has spent 22 years with the IMF so far, is optimistic about India’s growth prospects and direction of reforms.

Speaking to Arun S of FE, Richardson said with adequate forex reserves and positive sentiments around its medium-term outlook, India is not likely to be hit by a rate hike by the US Federal Reserve whenever it occurs. While declining to comment on short-run monetary policies just ahead of the Reserve Bank of India’s (RBI) policy review on August 4, he, however, did say that the IMF is still of the view that it is important to maintain a fairly tight stance of monetary policy to achieve the medium-term inflation path that the government and the RBI had agreed upon.

Edited excerpts:

What are the major challenges faced by the Indian economy now?

Two years ago, in the summer of 2013, the main worries were three: The high fiscal deficit, the wide current account deficit (CAD), and excessive inflation. Of these three, inflation and the CAD have since been brought down significantly, and they look more manageable now. While the fiscal deficit has come down, in our view there should be more ambition to reduce it further. A government (Centre plus states) deficit of 6.5% to 7% of GDP is very large by international standards and makes India vulnerable to external shocks.

A fourth major concern is that global investors are now consistently raising the issue of poor quality of the balance sheet of the corporates and banks. Although the “problem loans” have increased in recent years, in our view the level of systemic risk is modest. Indian banks are relatively well capitalised and well supervised. But high non-performing assets have limited the room for them to give fresh loans and made it tough for infra companies to take loans and carry out new projects. We are starting to see some green shoots in the project data, though, and hope the investment cycle would pick up.

What is your assessment of the way the bad loans are being tackled?

It is good the government and the RBI are not taking the easy road by encouraging large loan write-offs in the hope that growth will pick up really quickly. The argument instead is that writing off bad loans creates moral hazard and leads to more bad loans down the road and is therefore avoidable. Rather, the corporate governance at public sector banks (PSB) could be improved by bringing in top quality management. PSBs should have an arm’s length relationship with the government so that they can act more like private-sector banks and survive competition.

There is a set of best practices, including those proposed by the Organisation for Economic Co-operation and Development (OECD), on how countries can best manage state owned enterprises and public sector units (PSU). The OECD guidelines include setting up an independent board of directors, applying the best international accounting practices, filing public disclosures and listing on stock exchanges. They also advise hiring managers who are fit and proper and experienced in the discipline; not government officials but private sector professionals. In India, there is some move towards bringing in that modernised governance framework for PSUs, at least in the banking sector.

Then there are bigger structural issues leading to bad loans, including delays in clearances and difficulties in land acquisition. Some projects initiated four-five years ago were conceived when people thought India would grow at 10%-plus forever. It is possible that growth would get back up to 10%, but you should not assume it. It could also be that some projects have design features that were not optimal, and the promoters may have gambled a bit. So there is scope for haircuts. When investors or promoters are making high returns, they have to accept the risk of high losses also.

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