It may have been a sheer coincidence that the RBI Governor Raghuram Rajan spoke when a section of the media was baying for the blood of the fallen liquor baron Vijay Mallya. But his message was timely. The fear that the lynch mob might end up further slowing down the banking sector was not unfounded. For, if media hounds were to decide the correctness or otherwise of every lending decision, bankers would be persuaded to sit idle and close the credit operations altogether.

Now, this is no defence of Mallya or any other defaulter. He may well have siphoned off borrowed funds into his private accounts in shell companies abroad. But, to be fair, he did run a high quality airline so long he did. His high-cost operations sunk deeper into the red because of the sharp rise in the aviation fuel prices. He also defaulted on mandatory deposits of employees’ dues such as provident fund and health insurance contributions. Therefore, even as Mallya needs to be hauled up for his sins, care must be taken not to demoralise the entire banking sector. As Rajan noted in a lecture in New Delhi last Saturday, “there are a variety of reasons why loans have gone bad.”  Not every case involved malfeasance and required criminal investigations. Treating every case alike would “kill both lending and entrepreneurship…”

Rajan reiterated that the exercise to clean up the stressed assets of banks was essential in order for them to be able to lend again. Banks hitherto did not have the power to force the borrowers to return borrowed funds or to revive the stressed assets through mergers, acquisitions, etc. The new banking industry regulator has hugely empowered the banks. Defaulters were now under pressure to pay up or sell out. Several highly leveraged industrialists were hiving off their assets in order to reduce their debt burden. “Our intent is to have clean and fully provisioned bank balance sheets by March 2017”, the RBI chief said. In other words, a pro-active central bank and a supportive government were now engaged in righting the wrongs of the UPA government. In fact, the same lecture revealed that Rajan and the government had established a very fine rapport, contrary to the fears of former Finance Minister P. Chidambaram who in a recent newspaper column hinted at the differences between Mint Street and North Block. Such differences, of course, existed when Chidambaram himself was the Finance Minister, but since his departure Jaitley and Rajan have evolved a fine working relationship. In fact, the RBI chief commended the latest budget, saying maintaining fiscal prudence was a key achievement. Particularly welcome was the allocation of higher resources for agriculture and infrastructure.

No, he wasn’t unhappy at the proposed monetary policy committee which will only strengthen RBI’s inflation-focused monetary framework. Instead of one individual, that is, the RBI Governor, taking the final call on monetary policy, a representative committee will have the benefit of multiple views and also ensure continuity. Nor was the Mint Street boss worried about the falling exports. India’s exports mirrored those of the emerging markets. There was no need to tinker with the exchange rate — “the ideal exchange rate is neither strong nor weak, it is just right.”

Global slowdown was a major factor. Yet, foreign direct investment this year was set to hit an all-time high. It was $ 38.7 billion in the first ten months of the current financial year and might top the highest level of $ 41.7 billion reached in 2008-09.

But there was need to improve domestic environment for strong and sustainable growth. In investment in education lay the answer to the creation of more and more jobs. For, equipping the young population with intellectual and vocational skills would ensure huge economic opportunities. Meanwhile, Rajan lamented that in spite of the changing global economic equations, the handful of old economies still dominated decision-making at the multilateral fora such as the G-20.  Developing economies like India will have to take steps to be able to make a difference at these forums. The clear-headed enunciation of the current economic scenario by the RBI Governor was a refreshing change from the jargon-laden critiques by so-called economic experts. Given that Rajan’s present term is due to end this September, the government should end uncertainty on this score. A second three-year term for one of the more articulate and forthright RBI bosses would be in order.

Source: Free Press Journal

RBI and Govt in sync to empower banks