Studies have suggested between 12% to 19% as the adequate level of reserves. However, the Reserve Bank of India is sitting on some 27-28% and no central bank in the world maintains such high levels of surplus.
RBI independent director S Gurumurthy, who has been very vocal on the benefits of demonetisation, has slammed the central bank’s policies and supported the government’s stand on relaxing lending norms for weaker banks. The sharp criticism by Gurmurthy, whose nomination on RBI’s central board had triggered a controversy, came ahead of crucial November 19 board meeting of the Reseve Bank of India wherein a range of issues raised by the government such as easing of PCA norms, reducing surplus cash reserves, and increasing credit to MSMEs, are likely to come up for discussion.
Gurumurthy was delivering a lecture on ‘State of the Economy: India and the World’ at the Vivekananda International Foundation (VIF). This is for the first time he went public since the spat between the government and the central bank came into light.
Here is all that he said:
On demonetisation: In a one-and-a-half year period before demonetisation, Rs 500 and Rs 1,000 currency notes rose to 4.8 lakh crore. This is what funded the real estate and gold prices, Gurumurthy said, adding that India would have gone the same way as what happened to the US in 2008 due to sub-prime lending.
On FinMin vs RBI: The ongoing tussle between the government and the central bank is not a happy thing at all. “The standoff between RBI and Government is not a happy thing at all… But I think an alternative is necessary and exists also. That is part of an overall correction of the Indian mind. You cannot point one institution as something which has to bring it,” he said.
NPA issue in the banking sector: The Reserve Bank of India mandated one-shot provisioning for bad loans, rather than spreading it over a period of five years. “NPA has been developing since 2009 and it peaked in 2014. At that time, RBI did not say ‘you provide’ but in 2015 it said ‘you provide’. So, providing at one go is a problem. If they had said you provide over five years, this would not have happened.”
On MSME credit flow: Reforms like GST, as well as demonetisation, hit the MSMEs hard. Asking for more credit for the segment, he said MSMEs play a crucial role in the economy, as they account for almost half of the country’s economic output, about 70% of jobs and 90% of employment. The sector has been starved for money and “robbed of credit”.
On RBI’s surplus reserves: Studies have suggested between 12% to 19% as the adequate level of reserves. However, the central bank is sitting on some 27-28% of the reserves and no central bank in the world maintains such high levels of surplus. Therefore, there is need to formulate a policy to decide the level of reserve should be kept with the central bank and the government is only asking for that.
On demand to ease liquidity norms for lenders: Indian banks are the lifeline here. However, the Indian policymaking is based on US model, in which the stock market is the prime mover, while the banking industry is a subordinate player. “So in a bank-driven economy, if you restrict the banks, you are restricting the economy. You are restricting the flow of funds into the economy.”
On imports: While making a case for restricting imports, Gurumurthy critiised the government, saying that the government has been following an utterly wrong policy wherein India’s capital goods import is more than oil imports. “We need to go in for heavy import restrictions. We have got to cut down the current account deficit and trade deficit in the next one year.”
Liquidity problem: The liquidity problem could have been handled if the government had not given up the right to print currency to the RBI in 2002. Thus, the govenment can not print money to infuse liquidity.
On PCA framework: There have been certain revisions in the prompt corrective action (PCA) norms recently and that is the area of dispute between the government and RBI. The PCA framework kicks in when banks breach any of the three key trigger points — namely capital to risk-weighted assets ratio, return on assets (RoA) and NPA.