Raghuram Rajan interview: In circumstances, RBI has to make decisions that banks skirt – The Hindu–11.09.2017

 

There is some criticism of the powers given to the RBI to give directions to banks to act against defaulters. Is it a good idea for the RBI to roll up its sleeves and get into what is obviously the turf of banks?

  • Well, if you put it in that way, the answer is that it is not the RBI’s job to make commercial decisions. The more into the nitty-gritty that it gets into, the more that the RBI moves away from its traditional job as regulator. That said, there might be special circumstances in which, at least temporarily, it has been requisitioned to make decisions that the banks will not do. Ultimately, the right resolution is to get bankers to make the commercial decisions that they have to make and not have either the government or the regulator to tell them what to do.

Is the move to get RBI actively involved born out of the realisation that banks are unwilling to act?

  • I think it is important that we clean up the banking system. When you push entities on to the bankruptcy court, you’re basically saying that bankruptcy code and its process internally is going to decide what the clean up is going to be.

You’re not making the commercial decision yourself, though triggering the bankruptcy code is itself sometimes a commercial decision.

So, it’s a small step you’re taking from the central bank. If the central bank is also going to approve haircuts, this and that, and the extent of it, then it perhaps becomes going beyond what one could reasonably expect the expertise of the central bank to be. But yes, this probably stems from the banks themselves being unwilling to take the ultimate decisions partly for fear of being blamed when they take haircuts and so on.

What do you think of the idea of merging the weak banks with stronger ones to contain the NPA mess?

You have to be careful in any kind of merger that you don’t merge and get a big weak bank! You’d hope that the strong bank would clean up the weak bank’s problems but there are very few banks without problems today in the public sector. So, the question you have to ask is are there any dangers in distracting the bankers once again with a new set of issues such as headache with mergers and so on and not resolving the real problem which is cleaning up their balance sheets.

But at a philosophical level, there’s this argument that our biggest bank is small by global standards and hence not able to fund mega projects or assume greater risks…

That may well be but at this point your most urgent task is to clean up the banks and recapitalise them. Once they’re on an even keel you can worry about that decision. But tell me, which are the mega projects that are waiting there to get financed by the big banks? It’s not clear to me that our demand for investment is that strong right now. There might well be some obvious mergers, I haven’t been looking at this in close detail. But I wouldn’t use mergers as yet another way to escape the necessity for cleaning up and hope that somehow you put a stronger bank with a weaker bank and figure out a way to clean up. It’s not clear to me that we have that many strong banks to believe that process will magically happen.

Some of your speeches during your terms as governor lead to adverse attention. If you were to give those speeches again now, do you think you would word them differently?

I don’t think so. I think that the alternative is not changing the speeches, the alternative is not speaking! Because, if you have a situation where people are looking for a certain angle, they’ll find it in whatever you say.

The point is not what you say but the fact that you’re speaking at all; in fact, the fact that you’re governor at all! In that kind of an environment I don’t think there’s the easy option of speaking different things. As I said in the book, the challenge is to make sure that every word stands on its own taken out of its context. That’s an impossible challenge!

You’re relatively young, experienced, been a central banker…is it right for me to assume that at some point in the near future you’ll return to India to a more powerful position?

It’s a good question, a hypothetical one.

I said in my letter to the RBI that I was open to coming back to work for the country if and when it needs me. At this point there’s no such need and I’m pretty happy working where I am.

via Raghuram Rajan interview: In circumstances, RBI has to make decisions that banks skirt – The Hindu

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