Expect decisions on economic capital framework to be implemented this fiscal, says Niti Aayog

Updated : November 21, 2018 06:26 AM IST

Autonomy of RBI is for it to seek advice and make up its mind, Kumar said.

There are some well-established norms on adequacy of capital reserves, Kumar said.

Rajiv Kumar is an economist and is currently the vice-chairman of the NITI Aayog. Kumar had served as the chief economist of the Confederation of Indian Industries (CII) and held senior positions in the Asian Development Bank, the ministry of industries, and the ministry of finance. Kumar said decisions on the economic capital framework to be implemented this fiscal. Autonomy of RBI is for it to seek advice and make up its mind, said Kumar, adding that there are some well-established norms on the adequacy of capital reserves

In an exclusive interview to CNBC-TV18 Kumar discussed the outcome of the Reserve Bank of India (RBI) board meeting. He also discussed the Basel regulatory capital framework and restructuring scheme for stressed micro, small and medium enterprises, among other subjects.

Watch the video here:

Edited Excerpts:

What are your first thoughts on the outcome of the meeting after the backdrop of stand-off and disagreement, is this a welcome patch-up?

Of course, it is very welcome and I am glad that better sense has prevailed on all sides and I hope this is a precursor to the macro-economic management team in the country working together. Yesterday’s meeting - long marathon as it was - I think in some sense a milestone because it is clear now that the two sides have agreed to approach the issues facing the economy together in a convergent manner and I hope therefore better results will be achieved going forward.

On the issue of the RBI’s capital, until now the capital has been decided and studied by several committees, the most latest committee was Malegam’s which I think in 2014 asked the RBI to handover the surpluses for the following three years in full because it was well-capitalised. Malegam was there with us yesterday, he said for three years he thought all the surplus could be handed over and then a fresh approach had to be taken. The point I am making is that on previous occasions it was always an RBI committee which studied how much capital it should keep, now RBI is going to be only one of the persons appointing members to that committee, does that mean that its autonomy somewhat chipped?

Not at all, I don’t think that should be concluded in anyway. I was a member of the RBI board, which considered the economic capital framework and even at that time it was clear within the board that the new economic capital framework should be decided, brought upon after the discussion with all people concerned.

The autonomy of the RBI is for it to seek advise from wherever possible to get into discussions, to get all the opinions that it can and then make up its own mind and to that extent, after this committee has met and submitted its report, it will ultimately be the RBI board, which will decide on what is the adequate level of capital reserves and nobody else. So to that extent, the autonomy of the RBI is completely enshrined, it is still preserved.

Since you have been in a previous committee that went into the capital, is there a broad agreement that revaluation reserves should not be touched and if at all any surpluses transferred, it should be only from the retained earnings, that was one point of view we got?

I think It will be quite a premature for me to make a comment on this at this moment given that there is a committee now which is going to look into all these issues. However, the only thing that I could say is that there are some well-established international norms for the adequacy of capital reserves of central bank and that should be one of the principal guiding factors before this committee, which is going into the issue.

Aren’t there several models of calculating capital, how long does it normally take for a committee to arrive at a formula? I believe there are some 30 models available.

Yes but all those models have been well-studied by all concerned people. I think this is available. The committee itself represents the much-needed attempt to reach a common ground and to reach a balance and neither side digging their heels into it. So when you set up a committee, you set it up to find the middle-ground and to find the balance between two opposite views and I think it should not take very long as far as I can make out. They are not going to do any primary research. I would expect it within this fiscal year.

We were told that the committee will be appointed in a week, so the result can be known when you think - 1-2 month?

I think so. In time for the decision whatever it is to be implemented within the fiscal year.

I am asking you because the retained earnings of the RBI, about 2.5 lakh crore are earnings put aside from over the past 20 years. For it to be transferred in one year to the government of the day could be little unfair isn’t it?

I do not think that’s anybody’s case. Nobody would want to weaken the central bank and its capital reserves and would want to make sure that it has the capital reserve that it needs plus a little more for the rainy day. So I doubt if there is anybody who is making that suggestion that you just said.

What about the Basel norms and the fact that they were postponed by one year. My point is not the postponement – that is a decision the RBI may have taken even suo motu but is this something that the board is qualified to make. The board has industrialists, social workers. In the past, it has had scientists. Is this at all the remit of the board to decide how much capital banks must have? It’s not that a technocratic decision?

I am not so sure about that because the point is that in 2013 when the new norms were announced and it was, in my view, announced suo motu by the RBI that Indian banks need to have capital adequacy reserve ratios of higher than Basel which itself is a pretty stringent criteria that you have.

I have always maintained and I have no hesitation in saying it that in a country where about three quarters of the banking assets are sovereign guaranteed and in effect, all banks have an implicit sovereign guarantee, I cannot see the reason for a norm which is higher than Basel-3. After all whatever the RBI stipulates or whatever the commercial banks do, ultimately affect all of us; you, me and all those who are represented on a board there because it does represent the commercial banks’ ability to leverage, it determines their ability to extent credit etc.

All boards of central banks do have a representative of different segments of the society and the decision-making in the bank, a board should be an active member in that.

The argument I heard from the RBI side is if something misfired, the governor is grilled by Parliament. The board is not grilled by Parliament. So what if a decision of the board misfired? Another reason why perhaps the board should advice and not decide?

The board represents the government of India and it is accountable to the people of India who elected them. In fact, the other side of the argument is that the RBI is not accountable to the Parliament. It is only once in a while called to the standing committee but the government in office is permanently accountable to the Parliament and therefore, if something misfires, for example, if the growth turns turtle in the country or if the inflation spikes, it is not the RBI management ever changed, when inflation went up to 12 percent or 10 percent etc., it’s the government which has held accountable.

So for any argument to be made that the RBI management can in some sense supersede the board because it's questioned by the standing committee of the Parliament, I think it has no ground to stand.

There was not the issue of liquidity in the banking system nor a special line of liquidity to NBFC were discussed. Should we assume that it is both the government and the RBI’s view that the worst is over in terms of NBFC problems and now the sector can sort itself out?

I am not sure it wasn’t a discount and if wasn’t discussed, I am a bit worried because it should have been discussed. The immediate problems of credit freeze and downsizing of NBFC’s balance sheet etc. may well have been tided over for a while, for the month of November, but I can see that in the next three months and coming up to the end of March, there is another big spike coming up and we need to be very careful with what happens with the sector because there are certain large NBFCs who may have a systemic impact.

By the way, one of my concerns is that the NBFC issue has not been addressed at least to my satisfaction.

Expect decisions on economic capital framework to be implemented this fiscal, says Niti Aayog

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