The appointment of Shaktikanta Das as the new governor of RBI ahead of the crucial Dec 14 Board Meeting of the central bank signals a stronger government representation on the central banks board. With this development, the ongoing friction between RBI and the government is likely to ebb.
It will be interesting to see what position the executive members of RBI, i.e., deputy governors, take on various issues on which the central bank dissented earlier. Significantly, pending issues such as estimation of RBIs excess reserves, its sharing with the government for fiscal spending purposes, forbearance for NBFCs, and an easing in the regulatory framework for banks subject to the Prompt Corrective Action are likely to see speedy actions. In addition, some of the tight regulatory measures that RBI had implemented in connection with the restructuring of stressed assets, change in leadership, and dilution requirements for private banks can also undergo some modification.
In the sheer momentousness of the change in leadership at RBI lies the context of the weakening in Indias GDP growth, continued stress in the banking sector, a shake-up in the NBFC sector and the IL&FS fiasco. Clearly, these factors do not bode well for the governments electoral fortunes that are getting impacted by a variety of issues such as farm sector distress, adverse situation in the MSME sector and a lack of job creation.
Hence, an amenable relationship between the central bank and the government will definitely be made good use of to address the economic dislocation in the foreseeable future.
Experiences over the past 10 years in India have shown that forbearance for the banking sector have not resulted in long-term resolutions of stressed assets. The ad hoc approach adopted by the government in PSU bank management and by RBI in the general management of the sector, as well as their collective decision to shy away from calling it a systemic and structural problem have resulted in the malaise to fester on even after 10 years of the 2008 Global Financial Crisis. Evidently, the magnitude of stressed assets has amplified significantly over the past five years.
While the enactment of the bankruptcy law has been a significant reform initiated to alleviate the lingering problem, it is pertinent to note that reforms in India have lacked a systematic and expeditious approach that they deserve.
In contrast, the more fitting upfront regulatory reforms adopted by the US in the aftermath of the GFC 2008, the continuous monitoring of the vulnerability indicators since then, and prompt corrective actions on any deviation have resulted in very robust and comprehensive financial stability conditions for the US financial system. This has been elaborated in the latest speech of Jerome Powell, Chairman of the Federal Reserve.
Hence, the success of the new leadership at RBI will depend on looking beyond the near-term imperatives of the government and etching out a blueprint for long-term financial stability in the Indian banking and financial services space. While an immediate term relaxation in the regulatory framework may provide some quick near-term gains, longer-term financial stability will require a much defter handling of things overall.
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