But as interesting as all that is, it is not important. What is important is that RBI and GoI have publicly critiqued each other and the core institutional arrangement has not just survived, but because informed, even if not even-tempered, arguments are healthy for institutions, the policymaking system straddling Delhi and Mumbai is most likely better off. This columnist had developed this argument in an
More important, now that GoI and RBI are likely to try and avoid GoI vs RBI headlines, are consequential questions that have no answers at the moment, at least none publicly available. These questions will likely determine how Raisina Hill-Mint Street relations evolve.
Shouldn’t RBI’s board functioning be reformed? It’s clear now that RBI’s brass is comfortable with an RBI board that basically doesn’t function as a board, that is, it doesn’t ask searching questions. If independent directors, whoever they are and whether you agree or disagree with their arguments, counter RBI’s brass on one or more areas, how’s that unfortunate? That’s what independent directors should do. How one wishes ILFS independent directors, to give just one example, had asked more questions. As RBI-watchers have noted, the central bank prefers it when a board within a board, called central committee of the board, takes all meaningful decisions. This mini board is basically RBI’s brass. No matter how much you wish RBI has autonomy on some key things – and this columnist certainly does – you can’t defend this arrangement. And if keeping this arrangement is how RBI reckons it will be autonomous, then we have a big problem.
Should GoI use Section 7 of RBI Act to tell RBI what to do? This is linked to the previous point. If RBI insists on running board meetings as a fait accompli for all directors, and if GoI feels there’s no way to get a greenlight on a non-RBI brass opinion, it may feel compelled to use it. It would, of course, create tension. But when RBI’s board seems to run like the board of a traditional lala company, the nuclear option may look attractive to GoI when it has strong feelings about an issue.
But is GoI right in what it wants (Part I)?. GoI wants that an exception be made for stressed power sector assets and take them out of the bankruptcy process. You can see why. Sparing stressed power assets from the bankruptcy process may allow speedier resolution by addressing specific pain points like fuel supply, power sale bottlenecks and provisioning rules. Getting some of these power plants going will be a big economic plus. But look at it from RBI’s point of view. If an exception is made for power companies, what will happen? Everyone will want exceptions. This is India. Big guys in industry, especially big guys with big, bad loans, are always looking for exceptions. RBI simply doesn’t want to open a Pandora’s box. On balance, it has to be said RBI is more right. The bankruptcy resolution process is in its childhood, it needs good, strict parenting now.
But is GoI right in what it wants (Part II)? GoI also wants RBI to tweak rules so that more loans can go to small industry. GoI and some independent RBI directors feel that rules under what is called the Prompt and Corrective Action (PCA) should be relaxed so that some public sector banks can lend more to tens of thousands of small enterprises that genuinely are starved of adequate credit now. Again, one can see where GoI is coming from. The bulk of Indian business that provide huge number of unskilled, semi-skilled jobs needs credit. RBI doesn’t want to tweak PCA because it fears weak sarkari banks will lend merrily to dodgy small industries and therefore create another loan crisis. So, both are right. There are two solutions. One, GoI pumps in capital into banks for them to lend to small industry while banks abide by strict rules enjoined by PCA. This will – or may – reduce bad loan risk. Second, RBI opens a special window to increase general liquidity, a demand that’s been made in the context of the NBFC funds crisis as well. However, GoI may not want to upset its deficit calculations by recapitalizing banks for small industry lending. And a line of credit can in effect get abused by dodgy firms getting relatively easy money. So, this is a really tough question. On balance, though, given how much of India’s economic activity is located in small industry, GoI has the better argument.
So, how will these four questions get answered? Or will any or some of them get answered at all? No one really knows. But what happens in GoI-RBI next will depend a lot on these questions.