Political Economy

RBI Stands Its Ground Against Centre, but the Big Business Elephant Still Hasn’t Left the Room

How should the banking system deal with close to Rs 4 lakh crore of either bad loans or near-default loans run up by just ten big industrial houses in major infrastructure sectors?

A gratuitous leak from the Ministry of Finance on the front page of a well regarded English newspaper says that the Centre saved the day by preventing RBI governor Urjit Patel from resigning during the central bank’s board meeting on Monday.

This is akin to taking credit for not going for the nuclear option, which in any case would have been self-destructive, resulting in a pyrrhic victory for the Modi government.

Of course the Centre is all powerful and can do anything it wants. But the exercise of real power lies in using it sparingly or not using it at all. The Modi regime is yet to learn this subtle art.

Therefore it wants to take credit for not using the nuclear option – in this case, Section 7 of the RBI Act – in its tussle with the central bank.

In reality, this is what happened over the last few months. The Modi government needlessly upped the ante by issuing letters for consultation under Section 7, a tactic not used since independence. Governments in the past have held extensive consultations with the central bank and resolved issues without using Section 7. This is exactly what happened in the marathon, nine-hour board meeting on Monday in which all issues were discussed, some resolved and others put off for discussion in another board meeting to be held on December 14.

In a way, the RBI has also stood its ground. With the help of hard data and analysis, the central bank managed to convince the Centre and other directors that they should not press for certain issues which have no merit at this juncture. The most contentious matter – the use of Section 7 to force the RBI to part with a large portion of its contingency reserves – is already off the table for immediate action. This happened a week ahead of the RBI Board meeting. The prime minister discussed this issue personally with Urjit Patel, who might have explained the pros and cons of the move in simple Gujarati. This might have helped in clearing the utter confusion on this score created by the likes of S. Gurumurthy, who can be credited with creating a lot of noise but little substance on the issue.The truth is that Modi saw the merit of distancing himself from the chartered accountant’s perspective.

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So, an expert committee will now look at how much reserves the RBI should hold in the future.

The RBI for its part broadly stuck to its existing framework of striking a balance between the need  for maintaining the integrity of the financial system even while helping with additional liquidity wherever needed, based on hard data and analysis. The central bank did not agree to a broad-based opening of liquidity window for the non-banking finance sector. Of course it will intervene whenever needed because by now it is established that there is no system-wide liquidity problem in the non-banking financial company sector.

The RBI will further discuss relaxation of the prompt corrective action (PCA) framework by some banks whose non-performing asset (NPA) situation might have improved after bankruptcy proceedings have enabled the sale of companies which had run up big bad loans. Over 10 banks cannot lend today under the PCA norms because their NPAs are over 10% of their total credit, and consequently their equity capital has eroded. The prudential logic of RBI is these banks can start lending only if they are adequately recapitalised by the government. Some new formula on this is being worked out.

There is a larger structural issue though which the RBI board must discuss in its next meeting. One would particularly like to hear S. Gurumurthy’ s views on it. He had suggested some months ago that the big business in India must be helped and aided by banks. Of course, the more widely-held view is banks have so far been helping and aiding only the big business houses at the cost of SMEs, who got battered by demonetisation.

But how should the banking system deal with close to Rs 4 lakh crore of either bad loans or near-default loans run up by just ten big industrial houses in major infrastructure sectors? This is the elephant in the room.

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If nearly 40% of total potential NPAs are concentrated in some ten big business houses, banks cannot start lending without fixing this first. This appears obvious, but instead the government is seeking a different set of favourable rules for the big business with large overdue loans. Just look at the way the State Bank of India, as a key lender, is endorsing a fresh revival package for the power sector companies many of  whom, as per the RBI circular of February 12, 2018, should have gone to the National Company Law Tribunal for liquidation or a change of ownership.

But this is not happening, as the Supreme Court has asked the electricity regulator and other stakeholders to consider another revival package, with the condition that if higher tariffs are passed onto the common man, consumer forums will be free to move the courts. And we all know how much staying-power consumer bodies have in their judicial battles with big business.

I am surprised though that the Modi regime is aiding this process in an election year. In fact, some cabinet ministers in the government are openly denouncing a circular the RBI put out in February 2018, which gave a six-month deadline to large businesses to either pay back their loans or go in for bankruptcy proceedings. This circular was hailed by everyone as reformist and much-needed strong action by the RBI precisely because such action was not taken under the earlier UPA regime. But as we approach general elections, the Modi government seems to be wavering on the RBI circular. The Supreme Court seems to have inadvertently helped the bigger promoters by staying the new rules for now.

The RBI circular is also a major trigger for the current face-off between the Centre and central bank, as it hurts big business by holding them accountable.

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For instance, the power sector itself has taken loans of close to Rs 3 lakh crore. With so much money locked up in just one sector and in just half a dozen companies, how can banks release funds for small and medium businesses?

This is a serious structural issue – concentration of large bank funds in just a dozen business houses. How can these funds be unlocked? The RBI board will have to discuss this, which means that the assault of big business on the central bank is far from over.