Dear all,
On 2nd April, 2015 RBI has completed 80 years.
It is highly commendable that our central banking authority RBI has played its role to near perfection in the transition of our country from an undeveloped to emerging economy. RBI as the banking regulator has overseen the accomplishment of the objectives set for the Indian banking by the Govt , be it whether post nationalisation of 20 banks in 1970s or post liberalisation in 1990s. Indian banking system has successfully transited from a protected environment to market driven scenario with competition from private and foreign banks. A testimony to the high level of professional commitment exhibited by the RBI Governors can be found during the country's economic crisis in 1990s and swift handling of the post sub prime crisis triggered by USA in 2008. It is gratifying that Mr.Raghuram Rajan is carrying this mantle marching onwards. The fact that India has not witnessed the collapse of any banking/financial institution under the supervision of RBI till date wherein the depositors" money was lost speaks volumes on the matured handling of the crisis situations by our central banking authority. We have to our distinction that till date our country has not defaulted or deferred its sovereign payments inspite of the forex crisis in 1990s nor did a situation arise wherein the losses of private financial/banking institutions had to be absorbed by the Govt, unlike in the case of USA where it had happened post sub prime crisis. The road ahead is to reach the milestones of financial inclusion of all our villages and in the process reduce the proportion of cash transactions in the overall money transactions . Certainly this may take two more decades and let us hope we will be able to achieve this, which in turn can reduce the incidence of black money in the economy.
In 1991 when India was facing forex payment crisis, we had mortgaged our gold and raised resources to meet the sovereign obligations. We have so far not defaulted in our sovereign payments. In USA after the sub prime crisis the govt has restructured its payment obligations by deferment of the same. This is nothing but a default in technical terms.
There are no instances in Indian banking history so far where a bank went for a toss and the depositors had to suffer or the govt had to fully bail out by pumping funds. (New bank of India, Global Trust Bank have been taken over by other banks on commercial terms ) Whereas in USA the mortgage companies which triggered the sub prime crisis went bankrupt and resulted in multiplier effect by dragging investment banks, commercial banks and other FIs into the mess. The insurance companies that did underwriting to these banks and FIs went for a toss!!! Finally the US govt had to intervene and bail out these players who were mostly private entities. There is no trust deficit by the people on the Indian banking system, for which our regulators have to be given their due credit, in my view.( I have confined my comments only to the banks and FIs that are under the supervision of RBI. Obviously lot many NBFCs, nidhis, chit fund companies that are under state govts' purview or Co-operative banks under multiple regulation have failed and the public money was lost where the role of RBI is very limited as they are not under its direct supervision. )
Why RBI is averse to giving banking licenses to large corporate houses?
With regard to the new banking licenses RBI has strong reservations in giving licenses to large business houses in view of the risk factors involved. In the case of large business houses RBI put a caveat that the powers of RBI in superseding the board of directors of the erring bank should be extended to their group entities spanning other sectors/segments so that any diversion/misuse of funds from the banking entity to its group businesses can be effectively plugged. Govt did not agree for the same as this is a complex issue where several laws have to be amended ( banking regulation, companies act , etc). This issue has been going on since Dr.Subba Rao's period and thankfully Mr.Raghuram Rajan too shares the same views. It may not be out of context to mention here that post sub prime crisis, as a part of basle III norms capital adequacy ratio of SIBs (systemically important banks) is to be maintained at higher level compared to other banks. SIBs are those banks that are part of a group having diversified business interests. If our large corporate/business entities are given banking licenses , many of them would fall in this category of SIBs. No wonder RBI is toying with the idea of encouraging payment banks in order to mitigate the systemic risk on one side and expand the financial inclusion on the other side as we do not want to chew more than what we can bite or swallow.
Why breaks on full convertibility of capital account?
Yes, we have not yet gone for full capital account convertibility. We have only done full convertibility of rupee for current account transactions and partial convertibility for capital account transactions. Unless the fiscal deficit is reigned in, inflation is under control and NPAs are reduced RBI will not venture to even think of full convertibility of capital account transactions. Monetary policy and fiscal policy are two sides of the same coin but the role of RBI in fiscal policy is very limited as it is under the domain of the Govt. These are the supply side constraints and the ball is in Govt's court. In fact RBI's scope to control inflation is handicapped since it has only interest rates as one of the effective tools in its hands where as the major factors causing inflation are supply side constraints due to lacunae in fiscal policy.
To quote Joseph E. Stiglitz ( A nobel laureate in economics Professor at Columbia University and ex chief economist at World bank) , " … if America had a central bank chief like Y.V.Reddy, the U.S. economy would not have been in such a mess." (These words are written in the comments to the book- "India and the Global Financial Crisis managing money and finance " authored by Dr.Y.V.Reddy , a compilation of 23 select speeches delivered by Dr.Y.V.Reddy).
As a banker I conclude by bowing my head in salutation to RBI .
B.N.V.Parthasarathi.
Mobile- 09885064644.
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