AIR spotlight summary(21-Aug-2016) on Challenges before the new RBI Governor
Urjit Patel has been named as Raghuram Rajan’s successor as a new RBI Governor. Urjit Patel is the 8th deputy governor who is promoted as the central bank chief.
Inflation Targeting and Monetary Policy
- One of the criticisms Raghuram Rajan had was that he ignored growth and focused on Inflation Management. There were expectations that interest rates will be lower, so that more industries particularly small and medium industries are able to borrow, it will help real estate where consumer borrowing from banks for housing loans, and borrowings by developer will lead to growth, and employment.
- There has been a significant change in the mechanism of Monetary Policy There has been a clear cut guideline for the RBI and that is targeted Inflation rate, which is 4% plus or minus 2%. The indicator used is CPI.
- Now there is a 6 member Monitory Policy Committee headed by RBI governor, which will be meeting for first time.
- There has been a call to reduce Repo Rate. This is the rate at which banks borrow money from RBI. With reduced Repo Rate, the rate for retail lending comes down.
Highlights of Urjit Patel in the Banking sector
- Urjit Patel has been the basic architect behind Raghuram Rajan’s focus on Inflation.
- Urjit Patel has been credited for his idea on Inflation Management.
- Inflation Targeting and Monetary policy Committee were recommended by Urjit Patel as a Deputy Governor.
Challenges for Urjit Patel
- How Urjit Patel handles NPAs will have a significant impact on the overall economy.
- There is a need for the banks to pass on the benefits of rate cut to the customers. The task for Urjit Patel in dealing with commercial banks is
- Working with them to pass on the benefits of rate cut to the customers.
- Management of Non-Performing-Assets (NPA), which is increasing day by day and the level it has reached (around 10%) is causing uncomfortable levels in the economy.
- Here is a very difficult task. If we try to force banks to pass on the benefits of rate cut to the customers, it will reduce the profitability of the banks, which are faced with large NPAs. On the other hand decision has to be taken so that, people at large, government, and stakeholders, should feel that those who are doing wrong are not let scot free.
- He also has to play a very critical role as a leader for Bank Management, particularly public sector banks management. PSBs will be looking towards him not only as a regulator, but as a leader, help them in the difficult situations of crisis, both in interaction with the government and managing the public perception.
- In dealing with PSB, his difficulties are many more in consoling them to pass on the benefits of rate cut to the consumers. 75% of banking is in PSBs.
Issue of NPAs
- There is a view that large number of corporate along with bank management misused the banking lending facilities, where those loans were given in a risky manner for the projects which are not viable.
- NPAs have primarily resulted from the bad performance of the banks, economy in general and with some external considerations like, large infrastructure projects not taking off, delay in land acquisition, and environmental clearance. Global environment has also affected the banks.
- Banks lending money without due diligence have to be punished. If it is done with a clear mala fide intension, then there is a need to punish them. Otherwise any punishment gives a wrong signal regarding managerial decision or the future lending.
- A clear signal has to go, that no wrong doers will be protected or saved. Otherwise banks will never perform in the right manner. This is a very difficult task for the new governor.
Public Sector Banks (PSBs)
- Merger and amalgamation of PSBs into a consolidated unit will make it more efficient, transparent and ultimately accountable.
- Larger banks will be able to withstand such bad situations.
- But just being large may not be good enough. Banks have to improve their capacity, infrastructure, IT facilities, decision making and transparency. Along with merger, other administrative issues also have to be pursued, so that working of banks will become more transparent, driven by more competence and technology rather than arbitrary decision making.
- RBI as regulator and custodian of the banking system has to take up regulatory effort, developing effort to improve the PSBs decision making and wherever required a swift commitment or swift disciplinary actions.
- It requires a delicate handling both in terms of strengthening banks management, banks decision making, and banks appraisal mechanism. There is a need to relook at the banks appraisal and lending mechanism.
The need of the hour is to bring private banking efficiency into the core banking system so that banks failure is not an option anymore and ensure tax money is not used for compensating PSBs inefficiencies.
Common public is hurt by the reduced deposit interest rate, and high rate of interest on borrowing. The RBI governor along with his team will have to have a proactive role in guiding the new licensees (like the payment banks) so that they are able to perform the role assigned to them in a manner that they don’t become a liability later on.