Former Reserve Bank of India (RBI) governor YV Reddy on Friday said had Infrastructure Leasing & Financial Services (IL&FS) faced a liquidity issue it would have been the responsibility of the RBI. He said, "Obviously it is an insolvency issue since the Government intervened. Perhaps, Government intervened since both LIC and SBI owned by it are large stakeholders in ILFS, and also because many infrastructure projects are involved." "In any case, RBI should be concerned at the risk assessment capabilities of public sector giants like LIC and SBI that allowed this to happen while having a large stake in ILFS," he added.
Delivering the Kale Memorial Lecture 2018 at Gokhale Institute of Politics and Economics in Pune, Reddy said according to law, RBI board will decide the excess reserves in its balance sheet, but government's judgement prevails on the adequacy issues.
Below are the highlights from Reddy's speech:The first attempt to transfer excess reserves:
In 1986, the government demanded RBI's profits for fiscal relief, but then-governor RN Malhotra said profits of the central bank should not be considered as an avenue for augmenting the resources of the government.
"There is merit in keeping at least the central bank's balance sheet strong if the Government's fiscal balance sheet is weak"
On Prompt Corrective Action: Certainly an operational matter. Governments generally persuade RBI, but not direct it in such matters.
Dilution of the Basel III norms: The transactions cost and the liquidity in particular in real estates, make the realisable value generally far less than the declared value. Thus, a case for the Indian norms to be more stringent than global ones.
Liberal lending: Any extra-ordinary push will jeopardise depositors' interest or induce systemic instability. Government and the industry ideally should respect the final judgement of RBI.
Governance and the role of RBI board: Must be considered keeping in view both the global practices and changing domestic circumstances.
Issues central banks should reflect: Operational independence, full-service central bank and monetary authority, and institutional independence.
Problems central banks facing globally: Geopolitical pressures, trade wars and the threat of digital currency.
Accolades for RBI: The apex bank has done well whenever it has the liberty to think globally, advise independently and act in the domestic context.
Challenges of RBI: Fiscal management, public sector ownership, external sector balance and coordination functions are resolved by the government.
Future: Depends on when and how the confusing era in regard to central banking ends.Message to RBI:
The success of the partnership between the ministry of finance and the bank depends on the manner in which the government desires to be served and provides opportunities accordingly. No country can have better public institutions than it deserves.