Economy

Former RBI Governor C Rangarajan asks government and RBI to uphold the spirit of accommodation

Updated : November 18, 2018 02:17 PM IST

Former RBI Governor C Rangarajan called for a spirit of accommodation between the centre and the central bank ahead of the crucial board meeting of the RBI. Rangarajan’s (86) comment came days before the crucial meeting that will see discussion on various key topics including easing of prompt corrective action (PCA) norms, cutting size of reserves and enhancing credit to MSMEs.

“RBI, the government and the board have to be in an accommodating spirit to resolve the issues”, said Rangarajan. Here is the full transcript of the interview.

Q: The first Basel norms came in 1996 but from 1998 the Reserve Bank has been insisting that the minimum of 9 percent capital be maintained , Basel has asked for 8 percent minimum capital – what do you think the RBI’s position should be and the government’s position should be in this?

A: I am not apprised of latest development in this area therefore I cannot comment on very specific points relating to these issues. Certainly, I believe that there is a need for risk rated assets ratio to be prescribed whether it is 8 or 9 percent, it is something that the RBI of India should decide in the context of developments that are happening in India and elsewhere in the world.

I would only say that it is the responsibility of the RBI to fix this and in the past they have taken both the circumstances prevailing within the country and also the norms that are in operation elsewhere in the world to determine what the appropriate risk rated ratio should be. I believe it is within the competence of the RBI to do that.

Q: From 1998 would mean 20 years, that is five RBI Governors have asked for one percentage point more than Basel prescribes and I believe their reasons have been that it takes a long time for Indian banks to retrieve assets that have gone bad because of the legal system and the transaction costs are also high, so their loss given default is higher – these arguments would wash with you and therefore the RBI requiring more capital than Basel – many other countries also do more than 8 percent.

A: I would say that the RBI is in a positon to judge the matters and prescribe it and I would therefore leave it to the RBI in the light of what is happening domestically and elsewhere in the world to determine. It is very difficult for people outside the RBI to determine but I would think that the RBI is the proper authority to take the decision.

Q: This MSME, SME package, we know that the banking system has not been able to reach out to the SMEs and this is a demand one hears in other countries also but is it wise for the banking system to be told to reduce risk-weights or reclassify only for MSMEs, a 180-day classification period or give one-time restructuring packages – is this a good thing to do at all?

A: This will also depend upon circumstances there are occasions on which for example with respect to housing etc weightages have been changed or altered.

I can only tell you that we do not have the relevant information to be able to decide on what the risk-weights attached to them, I would leave it to the RBI as best judge in this matter. They have all the relevant information. The need for helping MSMEs has been pressed not only now but it has been pressed for all the 25 years and therefore let the RBI take a view on it and decide.

Q: Since you said that the RBI is the proper authority which has the knowledge to judge several issues, what really should be remit of the Board? If you read the Act Section 7, it gives the Board general superintending powers that is 7 (2) of the RBI Act, 7 (3) of the RBI Act gives the same remit to the governor and the deputy governors with a phrase that says, ‘subject to regulations made by the Board to areas in which the board makes regulations, the RBI governor and deputy governor shall be in charge of general superintendent and other functions of the RBI. So on what issues can the Board directions to the RBI at all, to the governor?

A: It appears that the Board, as well as the RBI governor have concurrent powers – the clause 2, 3 that you talk about does not take away the power of the Board. The first part clearly says that the board has full powers and then talks about the powers of the governor also.

In my opinion, if you take these together, what comes is it is the Board as well as the governor have concurrent powers in running the institution, that is the way to interpret it. It is not as if the powers of the Board have been reduced. But the whole point is that the way in which the Board has functioned over the last several decades and evolution of the relationship between the Governor and the Board has evolved also.

Therefore the Board consists of people drawn from different sectors of the economy and there can be conflicts of interests between what the RBI is expected to decide and what the interest of the numbers of the Board can be. Therefore in a sense the way it is evolved is that the RBI Board has been more advisory on character rather than deciding on specific issues. That is the nature of the Board and the nature in which decisions have so far been taken. I would think that that evolution is a good evolution and that is the way in which the relationship between the RBI headed by the governor and the board should be.

But the RBI governor and the RBI so to say must look at the sense of what the Board is saying. It may not be that every specific issue the Board will pass a resolution that is not the important thing but there is a Board and it has powers and therefore the RBI must take into consideration the sense of what the Board wants. Therefore that must be built into whatever decision the RBI takes.

Q: That is a fair point, we have had eminent boards in the past, there have been Bharat Ratna’s in them. We had APJ Abdul Kalam, the scientist who later became the President on the board, we also had CS Rao and other eminent men like Narayana Murthy, Ratan Tata, Azim Premji and now N Chandrasekaran, the Chairman of Tata Sons, Bharat Doshi of M&M have been in the Board. Have there been instances where the Board and the RBI just don’t see eye to eye – it looks like on some issues like Basel norms or prompt corrective action filters there could be divergent view, what happens in that case? Can there be a legalistic view or should both sides just have to take into account each other’s view? How do you break if there is an impasse?

A: What is really important in a situations like this is for the RBI to take into account the sense of the board and act. On some detailed issues, the RBI will have to act finally but in so acting, what the board says and what the sense of the Board is must be taken into account. Therefore there has to be some kind of a mutual respect between the Board, the governor and the RBI.

Q: I am still worried there could be issues – for instance an SME package maybe one can see eye-to-eye and the RBI can go a distance but on certain issue like capital norms, it may be difficult to find a common ground. Can there be legal position, can the Board say legally, I am the Board and therefore you have to listen, can it give a directive?

A: I think the issue should not be taken to that particular point, after all the RBI and the government and the Board have to be in an accommodating spirit in which to resolve the issues. Some of the issues you are talking about have not necessarily come before the Board earlier. Broadly speaking, what should be the nature of the regulation these are the issues that are getting discussed at the board. Therefore I would really think there has to be spirit of accommodation between the Board and the RBI and I would say between the government and the RBI.

Q: Coming to the government and the RBI- sometime back the headlines were that the government had started consultations with the RBI under Section 7. This has not been hitherto. The government made it very clear as soon as these headlines came to say that we have not given direction, we have only started consultation because the Act says directions can be given after consultations with the RBI governor. Do you think if the RBI and the governor don’t see eye-to-eye, the government may be forced to give directions to the RBI? Would that be a healthy thing to do?

A: The framers of the original Act seemed to have the impression that under Section 7, instructions can be given often because look at the Section 7, it says the government can time to time give instructions. Now probably they meant at that time they would probably give instructions from time to time, that is somewhat strange. But the fact of the matter is that we should not make fuss of the matter that in the past this Section has not been used starting with Jawaharlal Nehru talking about the resignation of Benegal Rama Rau, it was very clear that the ultimate say is with the government.

I think the letter that Jawaharlal Nehru wrote Benegal Rama Rau is very harsh but it makes it very clear that the final say is with the government. There was an exchange between HVR Iyengar and TT Krishnamachari where the issue was once again raised by the governor regarding the issue of adhoc stationery bills. Finally, the finance minister told the governor that you have a right to be consulted but the final say is with the government. Therefore, over a period of time it has happened that Section 7 has not been used.

But I can also give you one more example during the 1980’s and 1995, the RBI issued almost a circular giving the freedom to commercial banks to fix the rate of interest upto one year, even though the government was consulted earlier, it came up and said that they do not agree with this. Finally, after some discussion, the RBI took back that circular and the freedom that was given to commercial banks was withdrawn. Governor Malhotra and I, agonized for several hours writing the letter withdrawing the original circular.

Over the years, the monetary policy had been discussed with the government and only after taking the approval of the government, the monetary policy had been released, it is only recently that things have change.

I must say that the recent change in the monetary policy framework is a big win for the RBI in terms of the autonomy it has in monetary policy.

In the discussions about Section 7, we must understand the important change that has happened, which has given autonomy to the RBI in terms of monetary policy. The finance minister gets to know what the change in policy rate is along with you and me and therefore that is an important change that has happened.

I would say in present situation, Section 7 should not be used because it will give wrong signals. It is time for the government and the RBI to sit together in a spirit of accommodation and find answers to the problems, Section 7 should not be used now.

Also Watch: Centre and RBI must accommodate each other on key issues, says former governor C Rangarajan