The autonomy of the Reserve Bank of India, which, for the first time, came under severe pressure from the government during the UPA regime, especially during the period of Palaniappan Chidambaram as Finance Minister, now stands officially diluted under the BJP-led NDA regime. Not only a new era of monetary policy formulation has dawned, under the Monetary Policy Committee, after 82 years, but, at the government's behest, the banking regulator is now being involved in the decision-making process of commercial banks to expedite resolution of their enormous bad debt through restructuring and moving insolvency proceedings, if necessary.
The Centre asked RBI to issue directions to banks with large NPAs to initiate an insolvency resolution process in respect of a default. The question is: why did the government feel such an urgent necessity to use the Central bank in the affairs of the management of NPAs of majority state-owned public sector banks? The government could set up an expert committee to help resolve the issue. Thanks to the lack of strict supervision by the government and political indulgence, the public sector banking system grew to be incredibly corrupt over the last four decades that might have principally led to the accumulation of such large NPAs. Honestly, the real reason behind using RBI for such a tricky operational function of commercial banks at this stage is not quite clear. But, this, along with a new system of monetary policy formulation, substantially diluted the essential functions of the Central bank.
Similarly, it is not clear why the Governor of Reserve Bank should openly sound alarmed on an age-old pre-poll political practice of promising bank debt waiver to marginal farmers. Despite contributing substantially to the country's agricultural production every year, millions of debt-hit marginal farmers live in utter distress themselves. It has been a matter of concern for the society and the government. Unable to return debts to banks and private money lenders, hundreds and thousands of such farmers choose to commit suicide every year to escape the debt burden. The country's political masters are left with little alternative but to waive part of their debts from time to time. Highly agriculture-based economies in states such as Uttar Pradesh, Maharashtra, Punjab, Telangana, Tamil Nadu, Karnataka, and Madhya Pradesh are also home to some of India's poorest farmers. It is none of the business of RBI Governor Urjit Patel to be upset with the newly elected UP Chief Minister, Yogi Aditya Nath's announcement of a Rs.36,000-crore farm loan waiver even if it, in Patel's words, "undermines honest credit culture, impacts credit discipline, and plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard."
Incidentally, Bharatiya Janata Party (BJP) in the UP election campaign, spearheaded by Prime Minister Narendra Modi and party president Amit Shah, was said to have promised loan waiver to the state's poor debt-hit farmers. The onus is now on Yogi Aditya Nath to stand by the party's election promise. One would expect the RBI Governor to keep shut on such a sensitive political issue though he may not be wrong to call for a consensus on such practices to avoid damaging the national financial balance sheet. The RBI Governor's outburst may have something to do with the banking regulator's new role of a decision maker directing commercial banks to expedite resolution of their enormous bad debt already running into some around Rs.9 lakh crore. He may be worried that soon the governments of BJP-led Maharashtra and Congress-ruled Punjab will follow the example of UP. This will, indirectly, make RBI's new task more difficult.
The RBI Governor has said: "if on account of this, overall government borrowings go up, yields on government bonds are also impacted. Thereafter, it can also lead to the crowding out of private borrowers as higher government borrowing can lead to an increase in the cost of borrowing for others." Urjit Patel would have probably avoided such a public reaction to the political decision of farm loan waivers if he was not asked by the government to wear a different hat to tackle the bank NPA issue. Normally, the country's central bank has little to do with decisions on farm loan waiver, government subsidies, freebies and bailouts, which are political. The Central bank is undoubtedly losing its clout. Lately, its proposal to introduce a new liquidity tool to help manage a banking system flooded with surplus cash is reportedly facing opposition from the government. The latter fears that it will give RBI the discretion to set an interest rate outside the purview of the monetary policy panel.
The functions of a country's Central bank are broadly limited to ten key areas. They are: issue of currency; money supply and credit control; inflation control and bank rate fixation; acting as banking regulator; banker to the government; foreign exchange control; custodian of foreign exchange and gold reserves; clearing house function; lender of last resort and collection and publication of statistical information relating to banking and other financial sectors of the economy. However, they seem to be undergoing a change, especially after the exit of Raghuram Rajan as RBI Governor, last year.
While the government is now partly controlling a key RBI function of monetary policy formulation, it has legally entrusted the Central bank with the role of directing banks on their NPA management. In the process, the RBI may slowly turn akin to a government department. Ironically, such a trend is being witnessed within months after the exit of a more resilient Raghuram Rajan to the autonomy of the Central bank, which is vital for the country's economic stability. Government-controlled weak Central banks were responsible for the collapse of many economies around the world. The government and RBI would do well to avoid overstepping into the functions of each other and follow the well-established global norms that benefited India and its people over the years since independence.