RBI under Shaktikanta Das

Sameer Kochhar, Author of ModiNomics, Defeating Poverty and Reforms Historian

Shaktikanta Das

In the seven months since Shaktikanta Das took over as the Reserve Bank of India’s (RBl)  governor on 12 December 2018, there’s been a sea change in the image of the central bank and its approach to policy and regulation.

Das was appointed governor at a time, the RBI was going through unprecedented tensions with the government, including a phase of public mudslinging, uncharacteristic of the decorum historically maintained by of one of India’s most respected institutions. The controversy had put RBI and the government in the midst of a public spat, leading to a loss of stature. 

That unfortunate episode truly seems a thing of the past. Not only have tempers cooled, no out of turn statement has been made by either side and normalcy has been restored primarily because of Das’ calm and mature approach that government has fully reciprocated.

That’s not all. 

He has made the RBI a more consultative regulator. Already, in Das’ tenure, it has announced as many as ten expert committees that are looking into a wide range of contentious policies—from liquidity management and ATM charges to digital payments and corporate loans. 

Das was widely expected to be a pliable governor, more sensitive to the government’s fiscal commitments, and New Delhi’s political priorities, rather than the RBI’s autonomy. But, he has proved his critics wrong by not coming under pressure to hastily part with the excess capital the central bank holds, something it was feared would take place as soon as he assumed office. The committee headed by former Governor, Bimal Jalan looking into the matter has still not given its report, although the Secretary Economic Affairs has submitted a dissent note. 

The extra fiscal room was not provided to the government for its preparation of the Interim Budget ahead of the important Lok Sabha election. It has not been provided even for the maiden budget of the second Modi Government. In an excellent balancing act, Das has not overlooked the government’s fiscal requirements by agreeing to larger dividend payments, but has not surrendered the RBI’s reserves.

He has also taken a softer approach to bank regulation by making stressed asset rules less stringent, easing the corrective action framework and deferring guidelines on external bench-marking of loans and tougher accounting standards.

Not only has this approach made life easier for bankers, the NPA levels are coming down, liquidity position has gone into surplus and bankers are happy. Finally, they are heard about industry concerns before policy decisions are firmed up.

Das’ overall approach and policy decisions augur well for a recovery to begin at a time the economy, especially exports and manufacturing, are slowing. The approach will help increase the flow of credit to micro, small and medium enterprises (MSMEs) that are stressed after the money markets were hit by the NBFCs crisis, which has been kept under control by preventing it from growing into a panic-inducing situation.  

For instance, banks had wanted a few changes to the 12 February circular on resolution of stressed loans. Their inputs clearly reflected in the revised circular of 7 June on the same matter.

The RBI allowed banks and NBFCs to restructure some MSME accounts, which were in default, but were classified as standard accounts as of that date. This one-time scheme would not impact the account’s asset classification.

Eleven government owned banks and one private bank were under the prompt corrective action (PCA) framework when Das joined the RBI. Six have already exited since then and can now increase their lending operations.

All these measures will ease the flow of credit and liquidity to the economy, especially the MSMEs.

Further, the Monetary Policy Committee, after Das became governor, has cut the policy rates thrice already in this calendar year. Banks are beginning to transmit this into lending rates. This is going to be crucial in supporting GDP growth.

(Sameer Kochhar can be reached at skoch@skoch.in)

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