Strong RBI helps the economy: Know why raiding RBI reserves is a bad idea

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New Delhi | Published: November 7, 2018 12:26:14 AM

Govt asking RBI to relax PCA norms and forbearance on power loans is odd since no govt has done more to fix bank balance sheets via the IBC route.

Strong RBI helps the economy

Raghuram Rajan has weighed in on the serious differences between the government and RBI, commending deputy governor Viral Acharya for sounding a warning in support of RBI’s autonomy. The ringing endorsement from Rajan, not surprising since he was in the hot seat not so long ago, should boost the morale on Mint Street.

The central bank has been at the receiving end because it has been resisting the government attempts to wrest concessions: it wants RBI to transfer some of its capital reserves to the exchequer, waive the IBC route for stressed power assets, ease the PCA framework for banks, lower capital adequacy norms and, amongst other things, open a line of credit for NBFCs.

With the central bank not relenting, the government has invoked Section 7 of the Banking Regulations Act (BRA) which means it can direct the central bank to do as it wants. That was clearly uncalled for and prompted a fierce and justified response from RBI which feels its autonomy is being threatened. The disagreements are unfortunate. While one can understand the government needs to ensure the economy doesn’t lose momentum, it must not lose sight of the larger interests of the country.

And, having supported the RBI’s initiatives to fix the banks—as no government has done before—it must not undo all the good work. Indeed, the IBC was the work of this government. Before that, Rajan had called out errant promoters and the Asset Quality Review(AQR) was initiated in Q4FY16 to ensure loans were classifed correctly and bad loans were not evergreened. The exercise showed who had been swimming naked. Industrialists in this country are not easily shamed, but they had been named. The government backed Governor Urjit Patel when he drew up lists of near-bankrupt companies to be resolved under the IBC. Till that point, no promoter had imagined he would lose his company but today several of them have. And while, in some instances, the banks have paid a big price taking steep haircuts, in some they’re likely to get good deals. The AQR and the resolutions under the IBC have ensured that banks have been able to recover some of their dues and that responsible promoters have taken over the insolvent businesses.

While some part of the large loan losses were the result of adverse changes in the business cycle or a shortage of raw materials, some were certainly due to willful defaulting. This is one reason India needs to have stricter capital adequacy norms. The finance minister recently charged RBI with looking the other way when banks were lending recklessly post the global financial meltdown. The problems in the HFC and NBFC space are a result of an asset-liability mismatch, which has happened in the last few years under the watch of the ministry of corporate affairs which, on Monday, flagged concerns of a liquidity risk. Were the MCA and the NHB looking the other way when the HFCs and NBFCs were lending long and borrowing short? Some analysts have pointed out that the manner in which HFCs are accounting for assets and liabilities isn’t quite kosher. The government is worried that defaults by a couple of NBFCs or HFCs could set off a crisis in the money markets that are already spooked by withdrawals of some `2 lakh crore from liquid MF schemes in September. It has asked the state-owned banks to bail out the NBFCs—SBI has trebled its allocation to buy assets of NBFCs or lend to them. The NHB has upped its refinancing budgets by 25%. As Rajan said, the government will want some leniency—it has reportedly asked the central bank for a line of credit to NBFCs and MFs. So far, RBI hasn’t offered any but last week it allowed banks to give a partial credit enhancement to bonds of NBFCs and HFCs.A line of credit to NBFCs, with riders attached, could be given simply to spare the markets more turmoil. But errant NBFCs must be disciplined because they have grown too fast for their own good.
The point is that the government must be reasonable. A line of credit is not an outlandish request—though it encourages rash lending by NBFCs and should, ideally, be resisted—but asking for `3 lakh crore of the RBI’s reserves is. As Rajan has pointed out, it will be inflationary because there is just that much money that can be created. But even before that, it is important the central bank commands a AAA rating. Else, without the kind of equity reserves RBI had, it would not be possible for it to enter into the kind of international swap agreements it did in 2013.

Counterparties must be convinced RBI has the ability to honour its commitments.

It is one thing to ask for easier norms, whether for caps on foreign portfolio investments in corporate bonds or for hedging requirements for infrastructure loans, but raiding RBI’s treasury doesn’t become the government. Riding roughshod over RBI will not fetch the government any marks; on the contrary, it will hurt India’s reputation. No central bank wants growth to suffer but the growth cannot come at the risk of financial instability. These are difficult times and the government must allow RBI to keep the financial markets strong.

shobhana.subramanian
@expressindia.com

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