Both RBI and the government need to get their priorities right

Scams invariably result in blame game. The blame game involving the government and the Reserve Bank of India in the wake of the Nirav Modi-Mehul Choksi episode follows this pattern, except that there is an important difference now. Earlier scams saw a face-off between the ruling party and the opposition, while this time even the banking regulator has pitched its tent in the battle and has engaged in some aggressive fingerpointing at the government and vice-versa.

This new sort of blame game is leading to a situation where both the RBI and the government are attempting to demarcate their individual territories. There is nothing wrong in getting a clarity on roles, but the trouble starts when the conflict over boundaries leads to a situation where more important issues are put aside.

As reported by this paper, North Block, the headquarters of the Union finance ministry, is likely to suggest to the RBI that it be kept informed regarding supervisory direction which it gives to banks, particularly with regards to non-performing assets, interbank audit and foreign branches. What happened at PNB might be cited as the reason behind this move.

However, it also appears that the government seems to be unhappy with RBI’s February 12 circular where the banking regulator had directed banks to disclose stressed loans. Banks had so far been able to camouflage this despite the cleaning up of the banking system over the last two-and-a-half years. Action on the circular is obviously going to lead to a situation where banks will declare a rise in NPAs over the next two quarters. The result could render the bank re-capitalisation package announced by the government inadequate. This will be troublesome. In an election year, no government would like to be confronted with a situation where banks continue to show an increase in NPAs.

What policymakers seem to be missing is that the clean-up of any system is a painful process and front loading of NPAs might not appear to be the politically correct thing to do at this point of time. Yet, the truth is that this course is not only correct but the only option left to nurse the banking sector back to health. If this pain is not endured, all the fresh capital which will be infused over next one and a half year could again go down the drain.

Secondly, our policymakers need to remember that a single regime is not important, systems and processes are more important. By asking RBI to keep North Block in the loop, the government is opening the door for interference by future governments in the central bank’s functions. What is the guarantee that when power changes hands in North Block, the same policy of asking RBI to keep North Block in loop will not be misutilised by future governments.

What is more important at this point of time is that the government, as the majority shareholder, and RBI, as regulator, should work together and resolve the crisis in the banking system. The crisis of credit deadlock would soon be making it to the headlines. The way PSU banks are shying away from giving credit is shocking. PSU banks have decided to stop disbursement of credit even after sanctioning them. In some cases, disbursement has been reduced by 50 per cent without assigning any reason. There are banks that do not consider proposals beyond Rs 25 crore because they believe that in future, even if there is a genuine business failure, bank officials would face the heat from investigating agencies.

Now credit is the lifeline of any economy and if that gets choked for any reason that is not monetary, then the economic recovery evident in the last quarter would come under threat. Given the fact that interest rates are unlikely to come down, it would add to the trouble of small and medium enterprises that have emerged out of the slowdown following demonetisation and GST implementation. Hence, instead of fight turf wars, both sides need to focus on ways to bring about a pick-up in growth.