Raghuram Rajan, 51, was brought in as the RBI governor a year ago when the rupee was in free fall. After winning the rupee volatility battle, he set in motion reforms to extend banking to all and raise the bar for corporate governance among lenders. His biggest challenge is to reform RBI. In an hour-long interaction with Mayur Shetty & Sidhartha ofTOI, Rajan says he's trying to get maximum impact with minimum change.
When I came in, my primary short-term objective was to change the conversation which had become focused on the exchange rate. In some sense, the exchange rate reflects how people think inflation will move in the future. So, we reassured the people that we will bring consumer prices under control. The second issue was to deal with bad loans and improve the framework for coordination between banks. The third was to highlight positives in the financial sector — such as bringing banks and telecom companies together for mobile banking. We moved fast on new bank licences and on payment banks and small banks.
My hope is that sometime in the first half of next year we should have these banks licensed. That will bring a whole new set of interesting players into the system. I have already seen interest from some unlikely players which will be good for revitalizing the system.
The second part of the agenda is 'work in progress', which includes inflation and NPAs where we already have the basic structure in place. One part of the second-stage agenda is restructuring the organization's set-up and improving the skill base of the RBI to ensure that it is second to none as a central bank. We have the luxury of space to do this as we have a stable government without which there would be pressure on macro stability.
Is there any resistance to internal restructuring?
Change is always difficult. What we are trying to get is the maximum effect with minimum change. Our aim is to identify strengths and weaknesses. Plug weaknesses, and in a very small way bring in new talent. But we want to keep it minimal because this is a home-grown organization and we want to keep it that way for the most part. The RBI has got a great tradition, a great history, and can we build on that to make it fit to meet the challenges? As we grow into one of the top few economies, we will need a first-rate central bank to take care of the macroeconomic challenges and represent India at the international fora.
What are the gaps in RBI's present structure?
Across India, and not just in the central bank, we have to worry about specialization. For the most part in the government and elsewhere, it is the generalist who has held the roost. You want a banking supervisor to not just have experience of supervising banks but also one who could take courses in forensic accounting or in information technology. He can then use IT systems to discover where the bodies are buried. In fact, one of our IT people did that with a recent case.
A serious malfeasance was uncovered after going through the data dumps. In any area of the bank, greater specialization of younger people is needed. It will give people more opportunities. If you are a great trader for the central bank, you have outside opportunities as well. I do not see losing good people as a cost.
I see that as a benefit as you can attract more good people. They can specialize, we can train them — they give us a few good years and then they decide to look at opportunities outside. In a pyramidal institution like the RBI, we need to find a way of attracting good people who will give 10 years in this modern age when few people are thinking of a 35-year career.
You have said that there is no magic wand on interest rates. Historically, finance ministers have called for lower interest rates. Is that why you want Parliament to fix a mandate?
When I said Parliament, I also meant the government. The mandate (inflation target) should be set in cooler times. It should be set for a longer period and 10-15 years later we will figure out whether it's a good mandate and if there's a need to change it. The mandate can change over time as the emerging markets become more industrialized.
But it's not so much that I fear what the government will set. The government will always tell you that it wants low inflation. The real issue is the horizon over which to bring inflation down.
When you took charge, there was a perception that the relationship between the RBI and the government had improved. But there has been some chatter once again in recent weeks. Does the relationship remain healthy or is it frosty?
The press always wants to find something interesting and there is nothing interesting in a good relationship, so ever so often the press looks for words, to try and see a wedge between the RBI and the government. I am not complaining. Small things, where there may or may not be a difference of opinion, are blown up and it seems there are more differences than there should be. We have a very healthy relationship and I don't think there is any issue which is separating us in any way.
I don't think it's good for the RBI to see everything in the same way as the government does. We are the keepers of stability, and therefore the government actually relies on us to stop them sometimes. There is a healthy respect. We also understand there is a need for growth and there are certain actions needed to push growth.
It may have some effect on stability. There may be trade-offs on how much risk of instability are we prepared to tolerate in order to get more growth. Our focuses are a little different but the objectives are just the same. Where there are differences, it's a question of persuasion. It's a question of discussion. This notion of a deep wedge or that we are constantly at each other's throat does not have any bearing in reality.
You spoke of the second phase of your strategy. What are the elements, other than the RBI restructuring?
We have to take forward all the five aspects that I have talked about in the past. Inclusion is a big part — payment banks, we just liberalized the KYC norms, we have to work on the consumer protection code and improve the grievance redressal mechanism. Then, we need financing for small and medium companies.
On the distressed assets side, we have to see their level is brought down. While interest rate futures have taken off, inflation-indexed bonds haven't been a success and we need to work on making it more interesting and more accessible. With new banks coming in, we will also see some talk of bank mergers.
The bank structure will change quite a bit even if there are no ownership changes with public sector banks becoming more owned by public, with shares being sold more widely. If and when that has to come, it has to come after the changes in the governance reform.
One of the reasons for the situation when you took charge was the spillover effect of the US monetary policy. How well prepared are we for a hike in US rates?
We certainly have done a great deal of preparation and are in a very different position from the summer of 2013. The government is on a fiscal deficit reduction path and some subsidies will disappear including, hopefully, the diesel subsidy. The current account deficit has come down substantially and, of course, our foreign exchange reserves have picked up. People sense that we are serious about inflation, which also adds support to your currency.
Most important, there are signs that growth is just around the corner. My sense is that even when the Fed withdraws, people after an initial bout of withdrawal may consider India a good place to leave their money. We have plenty of reserves, but I see reserves as a second or third line of defence. The primary line of defence is we should be attractive.
You have been calling for better coordination among central banks. How much progress has been achieved on that front?
I made those comments to get the international establishments to start thinking about what I saw as biased treatment of policies which had large spillover impact. Quantitative easing of a variety of kinds was given a free pass even as the primary effect was on the exchange rate rather than on improving domestic activity. But when central banks of emerging markets started intervening in the currency, that was seen as a negative.
The IMF has since been taking this issue more seriously. It is now looking at these extreme monetary policies to fully gauge the spillover effects and evaluate whether they do more good for the world than harm. The IMF has put in place a surveillance framework under which it will take up the matter with member countries if their monetary policy has spillover effects.
There is also talk among central banks and multilateral institutions of creating a better liquidity facility for countries that get into trouble. If we want a more stable world, we don't want everyone to build a ton of reserves. It is better to have multilateral liquidity facilities.
On the domestic front, there appears to be a lot of concern on the level of bad debts and governance structures, especially in public sector banks. Is the situation scary?
Is it of concern? Yes. Is it scary? No. If you look at the distressed loans in the system — non-performing plus restructured — it's about 10% of the assets, largely in the public sector but not entirely. There is also some undercounting and evergreening. But the point is there are two or three silver linings in the cloud of distressed assets. One is that many of the held-up projects are getting back on stream.
The second aspect is that in cases where promoters do not have money and the squeeze that has been applied, coupled with the elevation in stock markets, there is sale of assets.
The third is that most of these are in the public sector and if a public sector bank needs recapitalization, there are resources by either the government raising more debt or selling other assets which can be infused to recapitalize the banking system. Unlike the banking crisis in the West where the worry was who would pony up the money, here there is no uncertainty. The government will do it.
It has never let any bank it owns go under. Also, growth will lift a lot of ships and growth will bring down NPAs. My primary concern is we should limit the hit to the taxpayer by pushing them to take speedier action. In NPA, the rule of thumb is longer you wait, the worse it becomes.
What about corporate governance in banks?
We commissioned the PJ Nayak committee, which has submitted its report on changes to improve the level of governance. There are a number of good ideas out there which include a longer term for PSU bank chairmen, splitting chairman and MD posts, have an appointment process both for top executives and bank directors which brings in more professionals.
Bank boards can become more autonomous in the process. All that needs to be done is to change the process of appointment. For example, when you are putting someone in charge of Rs 5 lakh crore of assets, you need an appointment process which is state-of-the-art. I think you can improve the process tremendously without going through the radical step of privatization.
If the government wants to try at some point, it could see what the effect of privatization of a small bank could be. But that is a call for the government to take.
In the Supreme Court verdict on coal allocations, there are fears that it could create a fresh set of problems for banks ...
I don't know what the judgment on September 1 will be and we have to wait till that time to see what the consequences will be on the banking system and loans. It has created uncertainty in the interim, which is reflected in the fall in share prices. Once the system is legalized, investors will have a much better willingness to move forward. The question is whether the change from the old allocation to the new may create some stress and we have to see what the Supreme Court says.
Allocation is something that you have discussed in the issue of crony capitalism. Have sufficient steps been taken to address that concern?
Whenever I have talked about this, I have talked about the strengths of our system also. We have always talked about the downside — the non-transparency in the allocation of natural resources. In the process of fast growth, some of these problems come to light because you did not have systems as they were not needed. For example, in the case of iron ore, there was a point when nobody wanted iron ore because it was too costly to take it out of the ground. But then iron ore prices went through the roof because of which you had this problem of illegal mining and despoliation of the environment.
So what is important is not so much that the aberrations happen but that the system responds to fix the aberrations. The nice thing about the system is that a variety of agencies — be it the CVC, CAG, Supreme Court and public activists — have noted the aberrations in the system and pushed very hard to clean them up. Today, for example, it would be unthinkable for any natural resource of value to be allocated in the way it was allocated in the past. Yes it slowed down growth, but that is the price we have to pay and it will repay in the long run when we have good systems.
The RBI has been moving towards reducing charges for consumers. But recently, there was a reversal with a reduction in number of free ATM transactions ...
We haven't increased ATM charges in any way. What was happening was that we were forcing banks to offer a number of free ATM transactions for withdrawals done at other bank ATMs. In other words, your bank had to pay the other bank for the transactions you did for free. We were forcing banks to pay for those transactions, which meant that some people were being cross-subsidized from elsewhere.
So why should we be determining cross-subsidies for the system? Yes, there are basic accounts for which cross-subsidy is required. We are protecting those. But for normal accounts, let the customer go to those banks which are offering more free transactions either because they have better technology or because they have more ATMs in their network. So, what we are doing is allowing more choices on both sides without forcing down banks' throats a system of cross-subsidy.
We have tried to protect the weaker sections as well as those in rural areas. But for people in cities with large accounts, let there be a free decision between the bank and those people.
There appears to be a trade-off between convenience and security in electronic payments as reflected in your recent order on Uber's payment system ...
In the circular we put out, all we said was 'we have a system of payments and somebody can't bypass the system'. The system was in place when the entity you are talking about came in. If we are a regulator, we can't sit and watch somebody bypassing an existing system. We have been responsible in saying that you don't have to stop it today. Find a system within the rules by such and such date.
To give you an example, there was a poor lady whose credit card was stolen. Although she got her card after we suggested the two-factor authentications, her bank did not go in for the two-factor. The lady could not get through the bank line because it was busy, but she filed a complaint with the police. The next day when she contacted the bank, the thief had stolen a large amount of money from the credit card. The net result was the lady is out of many thousands of rupees.
I know there are a lot of people saying let a thousand flowers bloom ... let a thousand payment systems thrive ... why are you trying to protect? If we had telephones that worked perfectly, if we had banks that took responsibility, then by all means their systems would work ... we could let a thousand systems flourish. But until we get there, a certain amount of protection is not unwarranted. That said, we are exploring the possibility of allowing small-value transactions on a simpler basis, provided the provider takes full responsibility of misuse beyond a certain point.
What about shadow banking?
We are looking at a supervisory framework for NBFCs and we have stopped registration of NBFCs for some time to take a holistic view and will issue broader guidelines. There is the issue of unincorporated entities taking deposits.
How do you look at providing overdraft facility with no-frills bank accounts?
The government has said that the overdraft facility will follow a period of use of the account and a sense from the banks' side that the person who holds the account is responsible for the money and has the capacity to repay. So, it won't be automatic. My sense is banks will make their judgment after seeing the usage.
Does this breakneck pace of rolling out the financial inclusion programme by opening one crore bank accounts in two days, with incentives such as a life insurance policy, pose a risk to the system?
We will have to see. Opening an account by itself is not exposing the system to additional risk. It exerts a lot of pressure on the system. There are schemes such as DBT (direct benefit transfer) that work well only when you have universal coverage of bank accounts. Some of these things (seeding with Aadhaar) — if they are all brought together — can reduce potential risk. When you do something very fast, there is a risk that documentation may not be as good as it should be. So long as there is a back-up and reliance on some of the things that have been done, you can mitigate the risk.
When you took over, you were described as a rock star and there were photos of you as James Bond. How do you look at this hype and were you surprised?
I have since then tried to play down that image. What is important for a central banker is that you have to convey that you know what you are doing. A 007 James Bond image is very dangerous for a central banker to have. But, the RBI (points to portraits of former governors) is being managed well. I have spent a lot of time watching the system and thinking about it from my 2008 report to my stint as an adviser to the Prime Minister and as the chief economic adviser.
There are a lot of things I know can be done. I am trying to push to get those things done sooner rather than later. There is tremendous amount of work inside the RBI on doing things, not just by me but my predecessor, Dr Subbarao. I don't want to take that James Bond (image). But, a banker on the move — I will take that.
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