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India’s RBI gets a new Governor

India’s RBI gets a new Governor

 The recent resignation of the Governor of the RBI, Urjit Patel due to “personal reasons”,as expected, has generated lot of discussion. The RBI was in the news recently for its apparent tussle with the government of India (GOI) on several issues including deployment of the central bank’s reserves.  The media had a field day speculating on the reasons for his departure.  Even the opposition parties cried foul.  Whether Patel resigned because he felt stifled, or had other reasons, will only be known if and when he chooses to publish his side of the story in his memoir.

 Reactions to the departure of the governor have been on expected lines. Many predicted the decimation of the stock markets and loss of confidence in the strength and resilience of the Indian economy. The stock market did fall during that time; however, it is unclear if the markets fell because of the exit polls on elections to key states indicating political instability or due to the departure of the governor. Beyond that, the banking and financial system in India remains on course. As regards confidence in the overall resilience of the Indian economy, there are no reports to suggests otherwise.

Is it true, as many in the media claim, that the RBI governor felt stifled by the government’s attempt to grab the bank’s turf? Or did he pick the wrong battles with the government? Should Patel have exercised discretion as the better part of valor and lived to fight another day? It would be interesting to look at some available pointers that may shed some light.

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Posted by on December 13, 2018 in Banking, Economics, India, Indian Economy

 

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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.

 
 

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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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