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The Raghuram Rajan Note

Akhilesh Bhargava

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Raghuram Rajan, the former RBI governor, who was too independent minded to suit the requirements of the BJP, has been a polarising figure of sorts, for the BJP itself. One section of the BJP, which includes the likes of Gurumurthy, the swadeshi ideologue of the RSS dislike him, and so does Mr. Rajiv Kumar, the vice chairman of the Niti Ayog. But others like Murli Manohar Joshi and Arvind Subramanian, the outgoing CEA of India, have admiration for his professional abilities. Due to his stellar credentials, though Rajan has gone back to his teaching job at Chicago, he yet continues to hover around the Indian policy makers. His recent comeback to the newspaper headlines in India, started with the CEA Arvind Subramanian praising him before the Parliamentary Committee headed by the senior BJP leader Mr. Murli Manohar Joshi, for having identified the NPA crisis and triggering its disclosure by banks. That led to Mr. Murli Manohar Joshi, requesting Mr. Rajan to appear before the committee to explain the roots of the NPA crisis, its build up and its solution. Rajan was requested to at least forward his expert written opinion, in case he was unable to appear before the Parliamentary Committee.

Raghuram Rajan did send a note as per Mr. Joshi’s request, outlining his expert views on the genesis, journey and the solution to the NPA crisis, that is so huge that it defies a solution at the moment. His note mentions the reasons for the NPAs, the restructuring schemes set up by the RBI to resolve the NPAs, the need to recognise bad loans, whether the RBI created the NPAs, whether the NPA recognition slowdown the credit growth and economic growth, the reasons why NPAs continue to mount and how do we prevent their recurrence. In his note Rajan cautions the government of the budding NPA crisis in the Mudra loans and the Kisan Credit Cards and the futility of loan waivers.

The key issue is that the huge NPA crisis has already occurred and India has lost over Rs.10 lac crores. While this matter needs to be resolved by recovery of loans and the most strictest possible punishment to the fraudsters and the wilful defaulters, the major issue going forward is how do we prevent the recurrence of such huge NPAs. Rajan prescribes the solution for this too and says at the outset that we must improve the governance of public sector banks and must distance them from the government. He rightly says that public sector bank boards are still not adequately professionalised and the government, rather than an independent body decides bank board appointments, with inevitable politicisation. He further says that banks need to improve the process of project evaluation and monitoring to lower the risk of NPAs. All this needs to be duly supported by further strengthening the recovery process. Rajan’s parting advice is that the government must focus on the sources of the next NPA crisis and not the previous one, for which he says that in particular, the government must refrain from setting ambitious credit targets or waiving loans. The sum and substance of Rajan’s expert advice is that political interference in banks must stop immediately, or else the next credit crisis will certainly recur.  No Indian politician has heeded to such obvious sage advice, since the days of bank nationalisation.

Banking

Is RBI governor Urjit Patel being pushed to resign?

News Desk

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RBI

Reportedly, the government officials were hurt that Viral Acharya chose to talk about the rift between government and RBI in public.

 

As the financial crisis deepens in the country, the rift between the Modi government and the Reserve Bank of India seems to be widening more. According to the reports doing rounds, the RBI governor Urjit Patel may consider resigning from his post.

The government and the RBI came to loggerheads after the deputy governor Viral Acharya hinted in a speech on Friday that the government is trying to hinder the independent working of the institution. Acharya warned that undermining a central bank’s independence could be “potentially catastrophic”. His warning came amidst the reports that government is pressurising RBI to relax its policies and trying to reduce its powers.

In a speech to top industrialists, he even cited Argentina’s 2010 economic crisis as an example. Acharya recalled Argentine government’s meddling in its central bank’s affairs led to a surge in bond yields which in turn hurt the South American economy.

The spat became more public on Tuesday when Finance Minister Arun Jaitley blamed the institution for “lending spree” during UPA era. While speaking at an event in New Delhi, Jaitley said, “The central bank looked the other way when banks gave loans indiscriminately from 2008 to 2014.”

Reportedly, the government officials were hurt that Viral Acharya chose to talk about the rift between the government and the central bank in public. According to a CNBC TV18 report, a source said that there is an “irreversible breakdown between RBI governor and the government”.

Meanwhile, a report in ET says that the government has invoked powers under RBI act in an unprecedented development. According to the report, separate letters were sent to the RBI by the government which suggest that the government might have invoked Section 7 under the RBI Act. It empowers the government to consult and give instructions to the governor to act on certain issues that the government considers serious and in public interest.

Commenting on the current crisis, former Finance Minister P Chidambaram tweeted, “Warning of more “bad news”, former finance minister and senior Congress leader P Chidambaram said, “If, as reported, Government has invoked Section 7 of the RBI Act and issued unprecedented ‘directions’ to the RBI, I am afraid there will be more bad news today.” He also pointed out that the section was not invoked even during the economic crisis of 1991, 1997, 2008 or 2013.

Earlier, former RBI governor Raghuram Rajan was said to have differences on policy matters with the Modi government.

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Banking

CHANGE OF BANK CEO AND FALL IN PROFITS

Akhilesh Bhargava

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CEO

There has been a sharp fall in the recently reported quarterly profits of Yes Bank and ICICI Bank. Their quarterly profits fell by over 50% and did not even meet the tapered down expectation of the street analysts. This collapse of quarterly profits coincides with the change of guard at the two banks. Both, Ms. Chanda Kochhar the former MD/CEO of ICICI Bank, as well as Rana Kapoor, the truncated founder CEO of Yes Bank, have been found guilty of accounting malpractices, violation of corporate governance norms and regulatory failures by the RBI, all of which make the financial statements of the two bank, authored under their tenure, to be suspect. While a new CEO has already taken charge at ICICI Bank, upon the resignation of Ms Chanda Kochhar, a new one is being recruited by Yes Bank, upon the truncation of Rana Kapoor’s tenure by the RBI.

The timing of the sharp fall in quarterly profits of these two private sector banks is directly correlated with the departure of their MD/CEOs. It is no unrelated coincidence. The new CEO has merely brought on the surface, what his predecessor had kept hidden so far. The fall in profits at these banks, is the start of a cleanup, by the new CEO after the departure of their CEOs, who have come under a cloud for having concealed NPA losses of over Rs.10000 crores each and for having indulged in corporate malpractices.

This sharp fall in profits, upon the departure of a bank MD/CEO, during the very first quarter of a new one taking charge, is a very routine phenomena that we see in India, whenever a new MD/CEO is inducted, whether in the case of a public sector bank, or a private sector bank. The incoming CEO obviously does not wish to carry forward the baggage of questionable accounting malpractices of his predecessor and it is thus imperative for him to start a clean-up of the bank’s financial statements, as soon as he takes charge of the bank. The best and the most opportune time for him is to write off bad loans/investments, which were not disclosed by his predecessor and come clean, is when he takes charge. It also serves as a testimony to the fact that an incorrect and window dressed financial statement was handed over to him in legacy. Even when Arundhati Bhattacharya exited as the MD of SBI, its profits fell sharply for the next few quarters, absorbing the huge NPAs that were not recognised during her tenure.

 

It is indeed ironical that when a new CEO takes charge at a bank in India, he needs to spot out the hidden legacy issues so that he is not later blamed for them. So instead of a CEO handing over the proud legacy of a robust institution, with very sound finances, India witnesses the reverse and that too concealed in accounting malpractices and sadly no action is taken against the retiring CEO, for the accounting malpractices done under his watch. It is very likely that the profits of ICICI Bank and Yes Bank will fall during the next quarter too.

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Banking

One defaults, but all at fault

Akhilesh Bhargava

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Reserve Bank

The credit sector in India, in the matter of borrowing and lending, is a highly regulated one and largely consists of banks and NBFCs. Both are regulated by the Reserve Bank, right from licensing approvals, to operating regulation and supervision. While banks both borrow and lend, most NBFCs are not allowed to borrow. Their lending activities are generally funded by the capital provided by their promoters/shareholders. Those NBFCs which are allowed to accept public deposits by the RBI are very strictly monitored by the RBI and yet under its very nose, the giant payment crisis has occurred at ILFS, that threatens to collapse India’s para/shadow banking industry. It threatens to be a contagion that can spread to other NBFCs, banks, mutual funds and insurance companies and needs to be contained at the earliest.

There are 11400 NBFCs registered with the RBI, with over Rs.22 lac crores of capital invested therein. Most of these NBFCs are small/medium entities, which are not allowed to accept public deposits and put public money at risk. These small NBFCs play a big role in providing credit to the system, by operating in narrow crevices of the economy, viz. villages and small towns, which are beyond the penetration of banks and big NBFCs. They are local players, who know the intricacies of the local economy and its market dynamics and have direct knowledge about their borrowers. They are thus flexible enough to lend to even those who fail to comply with basic KYC requirements, due to their grip on the local markets. They are important for the economy because they fulfill the credit needs of a key sector viz. the MSME sector. With direct owner management, they are often much better managed, than their bigger rivals, though their regulation can be tighter. In recent times the business of these NBFCs has grown at twice the rate that banks have grown.

The news is that taken aback by the payment default of a leading player like ILFS, the RBI proposes to come down heavily on the sector, leading to cancellation of the licenses of at least 1500 NBFCs, on the ground that they have inadequate capital, the RBI will also make it more difficult for new NBFC licences to be given. It is most likely that the RBI will increase the minimum threshold limit for registration of and grant of licenses to new NBFCs.

There is certainly a cash flow mismatch problem in the NBFC sector, led by the likes of ILFS, which threatens to infect other players. But can be sorted out by the RBI by infusing liquidity in the system and diverting it to deserving NBFCs, which the RBI has strangely not done so far. The closing down of 1500 small NBFCs in a simpliciter manner, particularly where public money is not at stake at all, is no solution to the crisis. It is a mere knee-jerk reaction which shows nervousness at the regulator’s level. Such closure will only create a further cashflow/credit crunch, due to the closure of these NBFCs, whose worst sufferers will be the small and medium enterprises. The huge payment default and mismanagement of ILFS, by the most ‘eminent’ professional managers, has become a curse on the entire system. Just because one defaults, all cannot be at fault and a sledgehammer approach as the RBI is adopting, will give no solution to the problem.

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