RBI in several dilemmas

This refers to your editorial (Business standard dated 1/04/15). The fact that the two rate cuts effected by the RBI in quick successions in the first quarter of this calendar year have not had any positive impact in the interest rates charged by the banks is a serious issue to be introspected both by the RBI and the Government to evaluate the influence of monetary policy as such in a fast changing economic scenario where availability of funds do not appear to be a constraint to trigger industrial growth in particular. Further high interest rate which itself is a result of inefficiency of banks to reduce their cost of funds  due to ever increasing non performing loans, establishment expenditures, poor asset liability management and lack of accountability of the non professionalism shown by the  banks’ boards alone cannot influence credit growth is an established truth from the  experience for decades. The  risks on inflation expectations continue to be on the high side as the oil price stability is at stake thanks to  unexpected changes in international markets and the possible inability of the government to contain both current and fiscal deficits, and the adverse effect of unseasonal monsoon on the prices of food items. No doubt RBI cannot remain a silent spectator when there is an all around hue and cry particularly from the market and the Government to soften its policy stance but to fall in line and bring some relief’s. The policy may announce changes to ensure comfortable liquidity to banks and also some incentives to enhance the credit off take; they may perhaps be in the form of some concessions in the CRR, SLR rates and forex area. This ensuing policy also will be an indicator as to what should be the future stance of RBI to protect and retain its otherwise limited and sagging operational autonomy. Its dilemmas are very many.          


Dr T.V. Gopalakrishnan

(This comment is in response to the editorial RBI's dilemma appeared in Business Standard dated 1/4/15).  

Debt conversion into equity Not a solution

This sort of approach to bring down NPAs only acts as incentives to willful defaulters in particular to get away with depositors funds. The solution offers only a temporary relief to banks caught in deep bad debts and that too because of indiscipline and inefficient management of the companies which were merrily accommodated by the banks due to indiscipline and lack of professionalism on their part as well. This is akin to shifting of the disease of elephantiasis from one leg to another paralysing the mobility. The menace of NPAs is part and parcel of business of banking, but this needs to be tackled professionally by imparting discipline on the borrowers to comply with the terms and conditions of bank loans which necessarily include avoidance of misuse and diversion of funds. The banks on their part have to ensure that they deal with depositors’ money and they cannot afford to fritter away these funds just to expand their balance sheet ignoring the economic merits of the credit proposals and competence, credit worthiness and capital contribution of the borrowers. Camouflaging NPAs is an art in our banking and this conversion of debt into equity is nothing but another additional window of opportunity along with restructuring of sticky loans given to banks to cover up their NPAs and deficiencies. The fact of the matter is that lack of professionalism, discipline and inefficiency of the judicial system encourage to loot the banks and this should not be allowed to go on. What is needed is a built in mechanism to enhance professionalism in banks, discipline among both banks and borrowers and improve the recovery culture with timely and quick delivery of justice by the legal system.Conversion of debt into equity only replaces Non performing loans by Non performing  investments without any sort of recourse to recover the invested money legally in case the Company fails once for all as the liability of the companies' are limited.

 Dr.T.V.Gopalakrishnan

(This comment is in response to the editorial Conversion of Debt into equity that appeared in Business Standard dated 23rd March 2015).

The need to retain RBI with its original glamour.

If  one were to make a serious analysis of RBI's functioning now, it can be unbiasedly observed that the institution has losrt its glamour and image over a period. It had enjoyed the credibilty of the Government, various markets and finacial institutions.It used to command respect, fear and friendliness and it was free from corruption charges generally. With the gradual relaxation of its powers, responsibilities in the name of liberalisation and development of the economy, RBI has been clipped its wings and the Government has taken over its supremacy. The departments have been drastically reduced and the number of staff have been cut to more than one third. Regulation and supervision which was a core function to make the Finacial  system strong, eficient, sound and supportive of the economy has been taken away quoting high sounding words and jargons just to convince, confuse and finally fool every one. For a developing country like India with all sorts of geo political, social, economic, intellectual conflicts and contradictions, an independent Central Bank has a  unique role of a referee and responsibility to take the nation  and its people forward  with all welafare related economic activities. What is happening now is virtually killing this institution.   A deep analysis of what has happened over a period particularly after the UPA has taken over in 2004 would indicate that RBI has been losing its eminent position  as the conscience keeper of the Government and the pivotal agency  for ensuring strong economic growth..Some how Dr Y V Reddy and Dr  Subba Rao resisted to the extent possible but the presnt Governor with all his opposition to the present stance of the Government and  intellectual conviction to retain RBI' s autonomy  does not appear to be successful so far  to resist the combined move of the politicians and the bureaucrats to make it an institution to be run as the the Government dictates.. They have  very cleverly taken some of his moves as very handy to convince him and reach their destination.

Dr.T.V.Gopalakrishnan (Personal Views).

   

Why to disturb RBI?

The existing set up is perfectly alright.Taking away RBI's powers one by one is not in the interests of the economy or the institution. Public Debt management should continue with RBI as long as the economy remains weak and the dependence of the Government on borrowed funds cannot be minimized. RBI's influence on monetary policy is also getting weakened with the proposed setting up of a Monetary Policy Committee as designed by the Government.Further, if inflation targeting is going to be the responsibility of RBI, if it does not have any say in public debt management, RBI cannot do full justice to regulate inflation and the Government will dominate the debt market in its own way leaving RBI a good for nothing Institution like any other body of the Government.RBI has earned a name, reputation and recognition nationally and internationally despite having no independent autonomy and it should not be allowed to be destroyed for some short term political gains. The Economy needs a very strong institution to command respect of the whole world and support for balanced economic development and for this RBI needs to be strengthened, made more powerful with full autonomy. Governments will change every now and then but Institutions like RBI provides the continuity of progressive economic policies and brings stability and soundness to the economy which are essential in these days of globalization.

(This comment is published in Money Life against the article How to Restructure RBI? appeared on 23/3/15)

Encash the Global Changes and the opportunities to give a real boost to the real economy of India

The changes anticipated in Global scenario need not upset India's calculations. The inflows increases if any can be utilized to set off the heavy borrowings resorted to by the private sector in the background of favourable interest rate scenario in overseas market and reluctance of domestic banks to expand credit and reduce the interest rate. Any change in international scenario is an opportunity for this economy provided, the policies are made flexible, transparent,result oriented and both the RBI and the government are on the same page in their thoughts and actions. India has great opportunities ahead in the context of reducing trend in international prices of oil, less than impressive performance expected from Brazil, China, Russia and south Africa, better prospects of growth envisaged in US and European Economies which can give a boost to our exports etc. The confidence level in the economy under the new government has been increasing day by day and as expected, if the over all governance standards get improved, the performance of the  the presntly non performing PSUs and PSBs can  definitely improve considerably to give a boost to domestic investment, consumption, employment etc. In fact the time is most opportune for the Indian Economy to show its mettle and perform.  

Dr.T.V.Gopalakrishnan  

Fix Black Money generation First

 Black Money first gets generated in domestic market and  transferred to International Market through official and unofficial channels.The generation of black money in the domestic market needs to be totally eliminated through enforcement of all existing laws of the land without fear or favour and this requires very strong will power on the part of the Government to plug all loopholes where black money generation is made possible.Real Estate transactions, High value transactions in cash involving gold, silver , and other Commodities etc are to be tracked intelligently with proper tie up of point of sales, cash transfers, tax collections and Income tax returns with the aid of Information Technology,social audit and independent verification of all transactions in a centralized data collection center. The guidance value fixed for land deals in various states are seldom scruinised and put through strictly  is a ground reality and this can be easily detected if honestly verified. The guidance value and the market price have no relationship and the market value on real estate transactions are three to four times of the guidance value. This can be easily tracked and fixed if the autorities so desire. The loss of revenue to the state Government through Corrupt practices in real estate transactions is known to all states and efforts are not even attempted to detect and fix the problem. Forex transactions are liberalised and it becomes an easy route to transfer funds. Over invoicing and under invoicing of imports and exports and other forex transactions the genuineness of which is seldom verified or suspected even make the international movement of funds is easy. The black money malaise needs to be tackled culturally by educating the people involved in trade, commerce and making the law enforcement agencies accountable and responsible. The problem definitely is not insurmountable and there should be a willingness. Readiness is all that is required. Involve people and see that the target is easily met. 95% of the population will definitely not have black money. Only a few are having it and it can be controlled over a period.

Dr.T.V.Gopalakrishnan

(This comment appeared in BS in response to the editorial The wrong prongs).

Do not kill a well run Institution for some political gains

The present Government cannot definitely take the risk of taking away  the importance of the Reserve Bank of India which has established itself as a well run institution and earned international recognition for its professional competence in maintaining monetary stability, developing a sound, stable and dependable financial system essential to provide the much needed support to the economy for its balanced and inclusive growth. It is easy to kill an organisation but the consequences that the nation would face would be disastrous. 

Dr.T.V.Gopalakrihnan

PSBs and autonomy

The autonomy for PSBs is only a wishful thinking. As long as the Government and RBI's nominees are on Banks' Boards and the the interference of the Ministry of Finance in particular in day to day working of banks directly or indirectly continues, autonomy for PSBs can only be in paper. The appointment of Directors on Banks boards by the Government based on influence and contacts kills the very thought of autonomy in PSBs. Financial independence can come to banks only if they manage the loan and investment portfolio professionally and the Government directors do not dictate terms on the sanction of loans and write off of loans. Further, the SLR requirements to suit the Government borrowings and the capital induction by the government at periodical intervals also affect the autonomy as the Banks have no independence to manage their finances the way they want on commercial lines.PSBs autonomy is always at a distance and it is only chasing a mirage.

 

Dr.T.V.Gopalakrishnan

SEBI to regulate the Financial Market A dangerous move.

This is a dangerous move and the entire financial system would be in a mess and collapse early..In fact, to ensure monetary stability which essentially calls for a strong and sound capital market, money market, forex market, insurance and credit market, the SEBI and IRDA should be brought under RBI and the RBI Act needs to be amended from this angle. The loss of powers by the politicians and the bureaucrats seems to be working to think in such terms and there is a calculated move to clip the wings of RBI. It is definitely a cynical and short sighted view inviting trouble and disturbance in the financial system exposing the economy to all sorts of risks upsetting the objective of making India strong in all respects.Thanks to RBI only, the economy has been getting recognition all over the world and this needs to be recognised first by the Government and the bureaucrats.In fact the banking system is in a mess these days because of the interference of the Government and the setting up of FSDC and a committee (FSLRC) to  come out with  recommendations  with a preconceived idea of taking away RBI 's powers. The cracks are already visible in the financial system and if the present  government also  goes in the same direction, ache din will never be there and the economy cannot be expected to be on the right  track. Derailment is waiting to happen any time.  

Dr.T.V.Gopalakrishnan

Monetary Policy Committee, RBI , Government and Inflation

.The approach to have a monetary policy Committee (MPC) and making RBI responsible and accountable to contain inflation as targeted by the MPC is a welcome change and perhaps in tune with best international practice. But the success of this approach presumes the composition of the MPC without being represented by the nominees from the Government or having nominees as recommended by the Government. It also presupposes the independence of the RBI to have its policies attuned to reach the inflation target so fixed by the MPC without any interference of the Government and with its active cooperation in framing and implementing fiscal policies to work in complete alignment with monetary policy. The amendment of RBI act has to necessarily make provisions and spell out the methodology as to how RBI can have its autonomy in letter and spirit and how to prevent direct or indirect intervention of the government in RBI’s operations which involve transmission of monetary policy through banks majority of which are owned controlled and dictated by the Government ignoring the presence of the RBI. The monetary policy and fiscal policy should be mutually reinforcing to achieve the inflation target without ignoring growth and monetary stability. Can the Government with its lot of populist political ideologies can really be cooperative with RBI?

Dr.T.V.gopalakrishnan

Monetary Policy Committee, RBI and Inflation

MPC, RBI and Inflation:

The approach to have a monetary policy Committee (MPC) and making RBI responsible and accountable to contain inflation as targeted by the MPC is a welcome change and perhaps in tune with best international practice. But the success of this approach presumes the composition of the MPC without being represented by the nominees from the Government or having nominees as recommended by the Government. It also presupposes the independence of the RBI to have its policies attuned to reach the inflation target so fixed by the MPC without any interference of the Government and with its active cooperation in framing and implementing fiscal policies to work in complete alignment with monetary policy. The amendment of RBI act has to necessarily make provisions and spell out the methodology as to how RBI can have its autonomy in letter and spirit and how to prevent direct or indirect intervention of the government in RBI’s operations which involve transmission of monetary policy through banks majority of which are owned controlled and dictated by the Government ignoring the presence of the RBI. The monetary policy and fiscal policy should be mutually reinforcing to achieve the inflation target without ignoring growth and monetary stability. Can the Government with its lot of populist political ideologies can really be cooperative with RBI?

 Dr. T.V. Gopalakrishnan