Former RBI governor Raghuram Rajan is a sports fan. He has often drawn cricket analogies to express his views better. His remark that the RBI board needs to play like Rahul Dravid suggests that he is as much knowledgeable in cricket as he is in economy.
Amid the growing rift between the Reserve Bank of India (RBI) and the finance ministry, Rajan said: “Both sides have to listen to each other and respect each one’s turf. What is more worrisome is the change in the role played by the RBI board in all this. RBI board is not an operational board, it is not led by professional supervisors or central bankers. These are people from all the different boxes in life whose main role is to advise people, to council ... to play a Rahul Dravid, to coach in some sense. But not to make operational decisions and certainly not be loud like (Navjot Singh) Sidhu.”
Dravid was the “Mr Dependable” of Indian cricket as he put a price on his wicket. He was consistent and bailed the team out of difficult situations on numerous occasions — on home wickets as well as foreign pitches. In an interview to a news channel, Rajan further said: “I’m worried about the change in it as they (RBI board members) are supposed to be wise people who bridge differences, rather than force greater ones.”
"We've had excellent people on its board and there are still very good people on those boards. So, I would hope that they would come together to bridge these differences and reduce some of why RBI is not comfortable with a more active board,” Rajan said.
Rajan said the central bank is like a seat belt in a car, without which accidents can happen. Pitching for respecting the institutional autonomy of the RBI, he said the central bank has the liberty to say no if the government pushes it to be lenient. He said the objective of the board is to protect the institution and not serve others' interests.
“The RBI is something like a seat belt. As a driver, the driver being the government, it has the possibility of not putting on a seat belt but of course if you do not put on your seat belt you get into an accident and the accident can be quite severe.”
Historically, the relationship between the RBI and the government has been precisely this -– the government wants to focus on improving growth and it does all it can within the limits set by the RBI which are based on financial stability.
“So, the government will push, will try and get the RBI to be more lenient,” he said, adding the central bank would examine them in close details and in reference to risks to financial stability. “We (RBI) have responsibility for financial stability and therefore we have an authority to say no,” he said.
The RBI and the government have not been on the same page on different issues for some months now. The disagreements came out in open when deputy governor Viral Acharya in a hard-hitting speech said failure to defend central bank’s independence would “incur the wrath of the financial markets.”
It later emerged that the government had used a never-before-used provision of the law to seek resolution of issues, including the easing of NPA norms, so that banks can kick-start lending and support growth, and transferring more dividend to boost liquidity -- issues which the central bank thinks cannot be relented.
Rajan lauds Acharya: He said the unhealthy disagreements between both should not escalate further. “Once you have appointed a governor or deputy governor, you should listen to them,” Rajan said, adding that he commends Viral Acharya for warning in support of RBI’s autonomy. “Viral Acharya should be commended for warning in support of RBI’s autonomy.”
“The rift between the government and the RBI can be resolved if both sides respect each other’s intent,” he said, adding: “I don't think India should have a breakdown in the dialogue between the central bank and government.”
On disclosure of wilful defaulters’ names: Rajan said: “Issue of fraud is not necessarily the same as wilful defaulter. Wilful defaulter doesn’t want to pay but hasn’t run away with the money. Full arm of law should be applied to bring frauds to book, it's work in progress.”
On the issue of making the list of defaulters public, Rajan said that he is “not well-versed to understand why those names can’t be made public.”
“If frauds go by unpunished, it simply encourages more fraud. If there is a sense that there is no place on earth where you can hide because the long-arm of the Indian law will come after you, I think it will send a very sound message,” he said.
On Section 7 of the RBI Act -- on the issue of the government citing Section 7 of the RBI Act that gives it powers to issue directions to RBI governor on issues of public interest -- Rajan said it would be best if each side respected each other’s motivation and thoughts. “And ultimately the RBI after listening to the government and hearing what the government's issues were provided the best professional answer it could and historically it has done that. I have no doubt it is doing that today. It has a responsibility to fulfil to the nation. It has to listen of course but at the end of it, after listening it has to make a decision because ultimately it has that responsibility,” he said.
On NBFCs: On the problems facing non-banking finance companies (NBFCs), he said the central bank needs to examine the liquidity problem much closer and solve the issue by putting liquidity in the market.
“I think the markets are somewhat nervous but I don't think given that NBFCs account for 17 to 18 per cent of assets, that this is an unmanageable problem. I think we can manage it, we have to look carefully at it, see what is really a solvency issue, what is a liquidity issue.”
On MSMEs: On lending for small businesses, he stated that MSMEs (micro, small and medium enterprises) are hard to lend to, which is why they are always clamouring for more funds. “The right way is improving the credit process, not relax the credit standards. Right way to get funds to MSMEs is by improving business environment they operate in. The worry is that Mudra loans NPA are far bigger than we think.”