RBI’s James Bond on Demonetization, Bankruptcy Code & more…
The book “I do What I do”
has been one of the most awaited books (for me, at least) for 2017. The book is
not just a compilation of the prominent speeches and research papers of Dr.
Raghuram G Rajan but it gives adequate background of the same. In the
commentary part of the book (i.e. background), Dr. Rajan explains the economic
scenario, challenges faced by the Govt. / RBI at that point of time. For some
of the speeches, he has given a reference to the media / social media hype that
was created. Inspite of the fact that the book is a compilation of Dr. Rajan’s
speeches, I feel that this book is a must read for all law, commerce and
finance students and professionals. He gives a rationale of the decisions taken
by RBI w.r.t. Foreign Exchange inflows and outflows, fight against inflation, economic
growth, currency risks, Non Performing Assets, Monetary Policies, Jan
DhanYogana, competition in Banking sector, debt markets, resolving stress in
the banking system, independence of Central Bank, Financial Sector Legislative
Reforms Committee Report (FSLRC) & many more..
Primarily, the book is
divided into 3 parts viz. (i) RBI days, (ii) Global Financial Crises, (iii) Occasional
Pieces. The first part, i.e. the RBI Days,covers almost 2/3rd of the
book. It covers the first speech of Dr. Rajan as the RBI Governor and ends with
his last official e-mail addressed to the RBI staff. For law and commerce
students and professionals, this part of the book will be very interesting and
relevant. The other parts of the book (‘Global Financial Crises’ and
‘Occasional Pieces’) will be relevant (and interesting) for finance students
and professionals, as the information is quite ‘technical’.
Being a corporate law consultant,
author and trainer, I have ensured the write-up focuses on Dr. Rajan’s view
point on Insolvency and Bankruptcy Code (‘IBC’), large loan defaulters and demonetization.
In fact, the purpose of purchasing the book was to understand the rationale of
Dr. Rajan on the same.
Why the title
“I do What I do”: The title of the book is quite attractive. Like other people, I was
also very curious to know the purpose of having such title. Dr. Rajan explains
the reason in the “Introduction” of the Book.In one of the press conference,
Dr. Rajan was asked whether he was dovish like Yellen or hawkish like Volcker. He
replied as “I understood what the
reporter was asking, but I wanted to push back on the attempt to pigeonhole me
into existing stereotypes. Somewhat jokingly, I started in a James Bond-ish
vein, ‘My name is Raghuram Rajan…’ To my horror, mid-sentence I realized I did
not know how to end in a way that did not reveal more on monetary policy than I
intended. So with TV cameras trained on me, I ended lamely ‘…and I do what I
do’”.
The sentence became the
financial press headline the next day, with the details of monetary
policyrelegated to the inside columns. On his daughter’s comments on the
statement, he said “The commentary on
social media even reached my usually supportive daughter, who emphasized her
negative reaction to my unwitting sentence with repeated thumbs-down emojis!”
Dosanomics: In late 2015 and early
2016, the inflation rate had come down and the banks had lowered deposit rates.
However, few savers were unhappy, inspite of the fact that inflation had fallen
much more than the rates on deposits. Earlier, the savers argued that they got
paid 10% on their fixed deposits at banks, now they get 8%. Was that fair? Dr.
Rajan explained that it was indeed fair, as the inflation had come down faster,
so the real returns (in terms of goods and services they could purchase) on
their savings were now higher. In his lecture at NCAER in Jan. 2016, Dr. Rajan gave
an example of Dosa in relation to inflation. The media termed it as Dr. Rajan’s
‘Dosanomics’.
Job of the
Governor: Dr.
Rajan was the 23rd Governor of the Central Bank of India. His term
was from Sep. 4, 2013 to Sep. 4, 2016. During his tenure as RBI Governor, he
had regular meetings with Prime Minister Dr. Manmohan Singh and Finance Minister
Chidambaram, and then when the Govt. changed, with Prime Minister Narendra Modi
and Finance Minister Jaitley. On the least pleasant aspect of his job as RBI
Governor, he stated that it was dealing with bureaucrats who were trying to
undercut the RBI so as to expand their turf. In his last speech as the RBI
Governor, he offered suggestions to the Govt. on how to reduce these
unproductive frictions.
On RBI Governor’s work
profile in relation to other public administration job, he states that “The job of Governor is probably the most
fulfilling job any Indian economist could aspire for. There were many days when
I went home tired but happy that we had really made a difference. There are
very few jobs in public administration where one can say this because one is
always hemmed in by the need to get the concurrence of other organizations, and
turf battles make it hard to move forward. At the RBI, on many issues the
decision was ours, and ours alone, so progress was feasible and continuous.
This also meant that the job weighed constantly on my mind, for I had to keep
asking what more we could do, given the possibilities were endless. Putting a
policy economist in the Governor’s job is like letting a kid loose in a candy
shop!”
Demonetization:
Dr. Rajan
was asked many questions by Reporters on Modi Govt.’s bold move of demonetization,
but he refused toanswer for sometime. In the book, Dr. Rajan has given a
summarized opinion and background to such ‘bold’ move. He has stated that:
“I was asked
by the government in February 2016 for my views on demonetization, which I gave
orally. Although there might be long-term benefits, I felt the likely short
term economic costs would outweigh them, and felt there were potentially better
alternatives to achieve the main goals. I made these views known in no
uncertain terms. I was then asked to prepare a note, which the RBI put together
and handed to the government. It outlined the potential costs and benefits of
demonetization, as well as alternatives that could achieve similar aims. If the
government, on weighing the pros and cons, still decided to go ahead with
demonetization, the note outlined the preparation that would be needed, and the
time that preparation would take. The RBI flagged what would happen if
preparation was inadequate.
The government
then set up a committee to consider the issues. The deputy governor in charge
of currency attended these meetings. At no point during my term was the RBI
asked to make a decision on demonetization.”
Incidentally, such a
revelation comes at a time when the RBI report’s claim that 99% of the
demonetized notes were returned to the banks. This may have an impact on the NDA
Govt.’s performance in the upcoming general elections.
Resolving
Stress in Banking System: The Insolvency and Bankruptcy Code, 2016 was not effective during Dr.
Rajan’s tenure as RBI Governor. Therefore, with an objective to resolve the
stress in banking system, RBI had introduced number of Schemes for facilitating
bank resolution of distress. The Schemes were repeatedly re-examined to see how
they could be tweaked to facilitate resolution. Dr. Rajan, in his commentary,
said that “Unfortunately, with the
exception of a few hard-charging and conscientious bankers, the general mood
among the bankers was to continue to extend and pretend. They feared they would
be held accountable for any concession they made, and constantly (and perhaps
understandably) avoided taking decisions”
In the postscript to one of
his speech, Dr. Rajan has appreciated the efforts taken by the NDA Govt. in
enacting Bankruptcy Code and amending various acts governing debt recovery by
making them less easy to game. He concludes by stating that “These are important steps forward in
rectifying the balance between borrower and lender in India. However, the
operational effectiveness of these changes needs to be tracked, and further
amendments enacted if necessary, until we have a resolution system that works
in a rapid, fair and transparent way.”
Large Promoter
Defaults: In
one of his lectures, Dr. Rajan deliberated on the large borrowers, their
defaults, role played by the public sectors banks and taxpayer’s money. He said
that the reason we are willing to protect the borrower against the creditor is
that the hated moneylender looms large in our collective psyche. He stated that
the large borrower today is not a helpless illiterate peasant and the lender
today is typically not the “sahukar” but a Public Sector Bank. He opined that “When the large promoter defaults wilfully or
does not co-operate in repayment to the Public Sector Bank, he robs each one of
us taxpayers, even while making it costlier to fund the new investment our
economy needs”.
In a very interesting
conclusion, which has an importance in the present economic scenario, he said
that the solution is not more ‘draconian laws’ (which the large borrower may
well circumvent and which may entrap the small borrower), but a more timely and
fair application of current laws. He said that India needs new institutions such
as Bankruptcy Courts and turn around agents. He concluded that “We need a change in mindset, where the
willful or non-co-operative defaulter is not lionized as a captain of industry,
but justly chastized as a freeloader on the hardworking people of this country”.
Indeed, Dr. Rajan rightly
points out that it is quintessential, we need a change in the mindset to
resolve the ever increasing problems of NPA’s or else it
will also be rendered like any other law with laudatory intent. It remains to be
seen how far does the Bankruptcy Code remains true to its intent and objective.
Good Bye RBI: The book contains the
letter addressed by Dr. Rajan to the RBI staff. He stated that RBI has done far
more than what was laid out in the initial statement, including helping the
Govt. reform the process of appointing public sector bank management through
the creation of the Bank Board Bureau, creating a whole set of new structures
to allow banks to recover payments from failing projects, and forcing timely
bank recognition of their unacknowledged bad debts and provisioning under the
Asset Quality Review (‘AQR’).
He
stated that, internally, RBI has gone through a restructuring and streamlining,
designed and driven by our own senior staff. He said that “We are strengthening the specialization and skills of our employees so
that they are second to none in the world” In the letter addressed to the
RBI staff, he states that “I am an
academic and I have always made it clear that my ultimate home is in the realm
of ideas. The approaching end of my three-year term, and of my leave at the
University of Chicago, was therefore a good time to reflect on how much we had
accomplished.”
As I said earlier, this book is a must read for all law, commerce and finance students and professionals. As a reader, you will know more about the RBI, its working, co-ordination with other Ministries, etc.
Special Thanks to Aayush Mitruka, a lawyer based in Delhi, for his valuable inputs and suggestions.
