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Government of India VS RBI

Government of India VS RBI

As a former officer of the Reserve Bank of India, I was shocked to read the recent remarks of Viral Acharya, Deputy Governor of the Reserve Bank of India. There are probably no parallels or precedents to such public remarks that tantamount to threatening the government of India by a ranking leader of the Bank.

The RBI, India’s Central Bank is a venerable institution that effuses dignity and reverence in the world of banking and finance, not only in India, but the world over. Its rather quaintly abstruse and almost self-effacing communication style – be it in its official communiqués or while interacting with the public at large – speaks of its tradition and élan that is generally matchless. This quiet dignity actually conveys so much more than what it actually says and adds an aura of enigma to it. For example, even a passing nod from the RBI Governor at a meeting of CEOs of banks can set tongues wagging.

Like most other Central banks, its presence is felt, rather than heard. Insiders are aware that RBI’s reticence and an unwillingness to hog the spotlight is also a calculated strategy to create space for itself.  It provides enough room to maneuver, change course if needed, and fight its battle with the government quietly and behind closed doors. That has only earned it respect and reverence.

Given this grand setting, it was upsetting to read the speech of Viral Acharya. It is very amateurish indeed and only betrays a lack of experience in a managing a large banking bureaucracy. He is certainly oblivious of the ethos and dignified traditions of a great institution that he represents. That the Deputy Governor chose to attack the central government in a public lecture has not only raised eyebrows, but also raised questions of why the government has not acted on this. His continuing in office has become untenable.

The RBI and the Government of India are like inseparable Siamese twins who have to work together in the interest of the country. Like wedded partners, they have enjoyed great moments of comradery as well as intense frictions in their relationship. Over the years, both have learnt to resolve or manage the differences amongst themselves without impacting the day to day operations or the public getting wind of it.

Having said that, let’s look at the controversy itself. It has been reported that the differences arose, among other issues, over the government’s proposal to transfer approximately Rs.3.6 lakh crores of reserves to itself. This is not unseemly given that the RBI is an agent and banker to the government. Differences over the use of the reserves are legitimate and must be discussed in closed rooms and not via the media. But in all such matters, if one is guided by past experience, the government view prevails.

For all practical purposes, the RBI has been and continues to be an extension of the Ministry of Finance, government of India. All past and current Governors and members of the Board are keenly aware that in any differences or tussles with Delhi, the Ministry of Finance has the last laugh. If, despite this understanding, Viral Acharya chose to discuss differences in public, it only points to issues extraneous to the functioning of the Bank.

The reason for RBI playing second fiddle to the governments stems from the RBI Act itself. The government appoints the Governor and has the power to sack him. It also has enormous powers to instruct the RBI directly or through its board to carry out its dikats.  In fact, there have been numerous instances of this.  One interesting anecdote that has done the rounds is that during bank nationalization in 1969, some in the RBI were said to have had their reservations. Apparently, Mrs. Gandhi’s office called the concerned senior officers directly and ordered them to prepare the necessary paperwork for the legislation. It was done quietly without any further ado.

After Independence, the government of India had firmly established a tradition of appointing IAS officers or other Central Services officers, particularly from the Ministry of Finance as Governors. This way, it ensured a de facto control of the Bank. Of course there have been a few notable exceptions – like Dr C.Rangarajan who was a former Deputy Governor.  Hence all this talk of the Bank’s independence is purely academic and largely a creation of the media to exacerbate the tensions. RBI for its part understands this and is fully reconciled to this reality.

It is the Congress governments that take the cake for running roughshod over the RBI. Many are only keenly aware of the tenuous relationship between P.Chidambaram, the former Finance Minister and Governors of RBI, particularly Dr.Subba Rao.

The current Chairman of the US Federal Reserve, Jerome Powell is also under pressure from the Trump administration. President Trump is on record fighting against the Fed. But the Chairman, given the august traditions of the Fed, has refused to enter into a public fracas. That does not mean he has given in to Trump’s pressure. On the contrary, he has continued with his interest rate regime in a dignified manner, never engaging the President in public.

As expected, the media too has had a role in overhyping the controversy. That the issue has been repeatedly opined upon by known Modi baiters comes as no surprise.  Also the timing  – a few months before the general election – seems too much of a coincidence. But what is surprising is the amount of support they have generated in the international press.

Viewed in this context, the Deputy Governor’s remarks reflect very poorly on the man. Firstly, the public airing of differences with the government is unprecedented. Secondly the reference to inherent threat to financial markets and hence the overall economy seems outlandish, to say the least. It must be made clear here that the markets will continue with minimal or almost no impact if the Governor and his team are sacked. The markets are dictated by the economic fundamentals and the overall regulatory regime that define the financial and banking infrastructure in India. These are already in place and will be hardly impacted by the individuals.  Lastly, the deputy Governor has displayed a complete lack of awareness of the ethos of the magnificent institution he represents. The markets and the executive leadership of banks in India now recognize this.

It is time for the Modi government to act decisively and bring in new blood into the RBI.

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Is It time For Structural Realignment Of RBI?

Is It time For Structural Realignment Of RBI?

The regularity of frauds at Indian banks has shaken the faith of the public in the banking system. The Reserve Bank of India (RBI) has attracted a lot of flak for the Punjab National Bank (PNB) fraud for the fact that it happened right under its nose and the fraudsters got away. Suggestions have poured in from well-meaning opinion makers and couch pundits – from replacing the RBI Board to privatizing the banks.

In this context, in what may be a rare occurrence, two governors of the RBI – one former and one current – hit the media spotlight and spoke about the issue.

Dr.Raghuram Rajan in an interview with a business news channel spoke more like a politician – all generalities and little or no specifics. He pointed fingers at the Prime Minister’s Office (PMO), conveniently forgetting that he was the governor when the fraud was being perpetrated.

On the other hand, Dr. Urjit Patel, the present governor, spoke of the need to privatize the public sector banks and appeared to deflect blame from the Central Bank. Many saw this as a response to Finance Minister Jaitley’s pointing fingers at the RBI for the scam.

RBI governors, in a time tested tradition, are known to be reticent and tend to shy away from media spotlight. But that may be in a bygone era and not in the new normal we all live in.

While there may be some truth in what Dr. Patel had said, the fact that he chose to speak at all on the topic and the timing were indeed bizarre. It is unclear why he chose to bring this up in public. Nor did Dr. Rajan cover himself in glory. The RBI and the Ministry of Finance, per an unwritten etiquette, never drop even the faintest hint of discord amongst them. This is because it has the potential to create turbulence downstream in the economy and could unsettle markets.

The RBI is a venerated institution that is deeply entrenched in the economy. In it’s over eight decades of existence it has requited itself extremely well. It has been at the forefront of expansion of bank branches and credit delivery. It had also played a pivotal role in the nationalization of banks in 1969 as well as in nurturing several developmental financial institutions.

To its credit, the central bank has embraced advances in technology to build a modern banking and supervisory infrastructure. It has adopted risk based supervisory model, a contemporary best practice in bank supervision worldwide. The key pillars of this model are a combination of onsite and offsite monitoring and greater reliance on backend data analytics to proactively gain insights into problem areas in the system. These early warning insights would enable the regulators to monitor banks better.

So, at least on paper, systems and processes were in place for effective supervision. Yet, the repeated occurrence of high profile frauds despite these innovations, only reinforce the common perception that the RBI and bank auditors have not lived up to the expectations of the country.

 The real culprit here, of course, is the fact that India’s institutions and enforcement agencies, despite constitutional and legal guarantees, have long been rendered toothless paper tigers by vested interests. That was done deliberately so that scams like the ones at PNB could be committed with ease.

But the deliberate defanging of the watchdogs or the ownership of public sector banks by government raised by Dr. Patel, are secondary issues that need to be addressed separately. They should not obfuscate the principal responsibility of the RBI in securing the banking system. Given the stature and dignity of the institution and office, it does them no good to pass the buck.

 Having said that, the truth however, is that the RBI carries an overload of functions and responsibilities that range from traditional central banking to other “developmental functions”. This was probably necessary in the early days after independence when the modern banking system was in its infancy. But today the situation is different.

Digital banking has rapidly taken root in every corner of the country today, thanks to technology and mobile phones. At the same time, it has also set the bar higher for customer expectations in convenient and secure delivery of banking services. This, in turn, has only accentuated the enormity of challenges in managing and regulating the burgeoning industry.

The fraud at PNB has exposed the vulnerability of the banks system in the new digital ecosystem. There are powerful lesson to be learnt here. Institutions that do not adapt and change with the speed of time risk becoming irrelevant.  Hence the need of the hour is a structural transformation of the Central Bank to meet the enhanced challenges in the new digital banking order.

It is certainly an opportune time to review and offload some of the regulator’s functions. One recommendation would be to carve out the Board for Financial Supervision (BFS) into a separate organization. The BFS was constituted 1994 as a committee of the Central Board of Directors of the RBI “..to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies …”. It enjoys enormous powers under the Banking Regulation Act, 1949. In the light of repeated frauds, the BFS must be reincarnated as a more agile and results driven body.

An expert committee could help with the finer details and setting up of this new entity. Suffice it to mention here that this new institution must rise well above the turf battles between the RBI and the Ministry of Finance. It must be on par with other institutions like the Election Commission of Indian (ECI) and the Comptroller and Auditor General of India (CAG) to prevent the institution from being bludgeoned into submission by vested interests.

But given the current preoccupations of the government, the much needed administrative reforms for governance may not happen in the current term of office. Many pundits and analysts believe that the Modi government may have already prepared a blueprint for comprehensive reforms that will radically change the civil, police and judicial services in India. Redefining the role and function of the RBI must find the pride of place in the administrative reforms that is long overdue.

Creating this new entity will show the government’s determination in delivering safe and secure banking services to all Indians.

 

 
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Posted by on March 16, 2018 in Banking, Economics, India

 

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