The detractors of prime minister, Modi who leave no stone un-turned in lambasting his government for allegedly infringing on the autonomy of the Reserve Bank of India [RBI] -some even allege that the former is hell bent on destroying the latter – should consider the following:-
In the wake of the steep increase in non-performing assets [NPAs] of public sector banks [PSBs] rendering them financially weak, the apex bank has brought – 11 PSBs out of a total of 21 – under the Prompt Corrective Action [PCA] framework.
A bank is put under PCA when any of the three parameters viz. capital to risk (weighted) asset ratio [CRAR] [or CAR as it is known in common parlance], net-NPAs and return on assets [RoA] crosses a certain threshold. The banks coming under PCA face restrictions on lending – especially to risky ventures – accepting deposits, branch expansion, staff recruitment etc
This is akin to hospitalizing a person who suffers from acute sickness and giving treatment for a reasonable period – an overarching objective being to nurse him back to health. The RBI decision is in consonance with the practice adopted by central banks the world over to deal with financially weak banks. Then, where is the problem?
This has to do with the drastic changes in the extant guidelines under PCA framework brought about by RBI in April 2017. These included inter alia a steep increase in the CAR from 6% to 9% [now, it is even higher than the Basel-III norm of 8% prescribed by the Bank for International Settlements (BIS)] and reduction in the net-NPA benchmark from subsisting 10% to 6%.
These changes meant that in the event of either a bank’s CAR slipping below 9% or its net-NPAs exceeding 6%, it will be brought under PCA. Further, instead of RoA, RBI added a new criterion whereby if it fails to report profit for two consecutive years then, also it will be included under the PCA framework. The revisions are draconian and virtually tantamount to strangulating the banks.
The regulator has thus ensured that even when, the bank makes significant turn-around – achieving CAR of say 8.5% [from earlier low of <6%] or net-NPAs coming down to 6.5% [from the previously high level of >10%] even then it won’t be able to come out of PCA. This is because even the substantially improved actual don’t pass the test as per revised stringent norm.
This leads to double whammy. It has not only choked the flow of credit to industry and trade but also ensured that the concerned banks remain incapacitated and their normal business of deposit taking and lending comes to a grinding halt.
An argument that the other banks will increase their lending to compensate for the shortfall from those under PCA is self-defeating. The latter cater to particular geographies/regions and sectors; so substitution can’t be as smooth and simple as is thought to be. Besides, it can’t be any body’s case that the weak banks should not be given a fair opportunity to come out of the morass.
There was a time [especially during 2008-2014 under then UPA dispensation] when these banks took recourse to indiscriminate lending; in many cases, they sanctioned loans without conducting due diligence. They showed least concern even when these were not paid back/serviced; instead, more loans were given to enable the borrowers pay back previous loans.
During that phase, even the RBI abdicated its responsibility by not exercising necessary supervision which could have detected the irregularities/wrongdoings in time and forced implementation of corrective steps thereby preventing build-up to the present unsustainable/high NPAs. That was one extreme.
Now, when the present dispensation has put the entire banking system into correction mode and the NPAs afflicted banks are undergoing major governance reforms – along with requisite capital infusion by the center, the RBI is swinging to the other extreme by putting a brake on their lending activity.
It is ironical that the above action of drastically revising the PCA framework guidelines which had serious repercussions on the availability of credit and throttled growth of industry particularly micro, small and medium enterprises [MSMEs] was taken by the banking regulator without taking the stakeholders – including the government – in to confidence.
The RBI has also not covered itself with glory when despite inflation [as measured by consumer price index (CPI)] remaining well within the threshold 4% [(+)(-)2%] set by itself, it has refrained from reducing interest rates on several occasions ever since the ex-governor, Urjit Patel took charge in September, 2016. This hawkish policy stance has come in the way of reviving growth.
The central bank has refused to budge on the demand for providing adequate liquidity to non-bank finance companies [NBFCs] when the latter faced squeeze following a crisis situation engulfing the Infrastructure Leasing and Financial Services [ILFS]. It also denied any leeway with regard to its February 12, 2018 circular under which even a day’s delay in payment invites the NPA tag.
The RBI has every right to act independently especially when it comes to formulation of monetary policy. But, it can’t afford to ignore the effect of its actions on the economy. Yet, it has ignored.
The government which is fully conscious of its responsibility to ensure inclusive growth and is taking necessary steps [simplifying procedures, cutting bureaucratic red tape, expediting approvals, improving ease of doing business etc] has every right to ask questions and proactively engage in discussion with the RBI. Accordingly, it has flagged concerns and impressed upon the bank to find solutions.
By any stretch of imagination, this cannot be construed as infringement on the autonomy of the RBI much less an attempt to destroy the institution. Yet, these actions – taken in the larger interest of the economy and people welfare – are being portrayed as if Modi is out there to lay a siege on RBI. The critics are using the resignation of U. Patel to reinforce their narrative.
The opposition parties should refrain from playing politics over issues concerning the health of Indian banks which is vital for economic growth.This malicious propaganda must stop.