Economy chokes if disbursements dry up for sake of prudence: Jayant Sinha

During the 2008 global financial crisis, the Federal Reserve and the European Central Bank did unprecedented things that are not in any text book, Jayant Sinha, MoS, Civil Aviation, tells Supriya Shrinate of ET Now, in an exclusive chat.

Edited excerpts:

The government and the RBI have stepped back from the brink but there are many who insist that this uneasy choice has been forced by political optics where the government could not afford to be seen at war with an institution like the RBI anymore.

I would not agree with that characterisation. In media, there is always this desire to sensationalise and talk up the differences but the reality is that every elected government and every central bank -- whether it is in India or around the world -- has some very healthy constructive tension built into the relationship.

As you know, policymaking is not a science. It is an art. Therefore to decide what the necessary policy moves should be, what their timing should be, the degree to which you do that, there is always a healthy debate around those kinds of matters between a government and the central bank. And that is really what we are going through right now.

There are very substantive issues around the table, issues around liquidity in the financial system, the stress that we have in the financial system around NPAs both in large enterprises as well as small and medium enterprises. There are questions about the economic capital framework that the Reserve Bank of India has been following. These are very substantive policy issues that require a very serious debate between the government and the central bank and that is really what we are witnessing here just now.

What I think we have achieved in the discussions and the deliberations is action on the items that require urgent moves and the ones that require deeper study, the ones that require a more analysis have been sent to expert committees to be thoroughly analysed and then action is to be taken on them.

But this meeting happened with the overhang of should RBI be made an institution governed by a board? That has not happened and many people are breathing a sigh of relief. We have had exemplary RBI governors from IG Patel to Manmohan Singh to C Rangarajan to Raghuram Rajan. These are people with global repute. Can a non-specialist board be made to talk down to them just to settle the debate on a board-run institution?

Yes we have exemplary people on the board of the RBI as well. We have the DFS and DEA secretaries who are very experienced, very senior and seasoned bureaucrats who had a long track record of economic decision making in government. They are there are for sure but then we also have very senior eminent people on the RBI board including people like Shri N Chandra who is the chairman of the Tata Group. We have people like Mr Bharat Doshi. We have people like Mr Gurumurthy who have thought hard and long about the Indian economy and many other very experienced and eminent people drawn from business as well as from academia. It is necessary to have a healthy and constructive debate and frankly it is important to have creative solutions.

We think about unconventional solutions because we have to navigate our financial system through some very difficult times. NPAs are obviously at high. Obviously, we have liquidity issues right now, particularly post IL&FS. These are times that we have to think through the full range of solutions -- creative and unconventional solutions.

If you go back and you think about what happened during the global financial crisis, the central bank at that time which was the Federal Reserve and of course the European Central Bank did unprecedented things that are not in any text book. It was because the governments of that time, the Treasury Secretary Henry Paulson and Ben Bernanke as the Federal Reserve Chairman sat down and figured out practically what the issues were and then took on some very unconventional approaches. That is team work, that is collaboration and that is really what we are seeing in action right now.

I agree with you that any management, whether fiscal or monetary, should be done with a collaborative approach. RBI should have heard the board and kept an open mind. That is exactly what the RBI is expected to do because it is the elected government of the day that is responsible to the people. The RBI should have absorbed everything. But should not the ultimate decision have been left at the RBI to be done at its own pace? There is this sense that the relationship between RBI and government is one of subordinate and superior whereas in reality they are far more equal than any other institution with the government?

We have to look at it in terms of the legal situation. We have to look at it in terms of actual norms that have been developed over decades and then we have to look at the practical situation that we have on hand right now. Legally of course, the RBI is an institution that the government can direct. That is the way RBI Act is set up. However, as I said, the norms have been and this has been established over decades, that the RBI has very significant and we have enshrined that through the MPC independence as far as monetary policy is concerned.

As far as exchange rate management is concerned, there are many areas where the RBI is fully independent. There are also certain other areas such as for example how to promote growth, credit growth in the economy, the supervision and regulation of the banks where there is a close collaboration and a close discussion. That has happened consistently over time between the RBI and the government and that is when we come to the third aspect that we have to consider which is the practical situation that we are facing right now.

The practical situation that we are facing right now is that we are dealing with a vast stock of NPAs that we inherited from the previous government. We are dealing with liquidity shock that has happened post IL&FS and we are dealing with the situation where we have to ensure that the Basel criteria are implemented in the midst of this liquidity shock, in the midst of this NPA situation. Given the practical circumstances, what we are seeing is a constructive healthy collaboration and discussion between the RBI and the government, taking into account the institutional framework that has actually developed in India over the decades.

Everything that we have just seen right now is really consistent with that institutional framework that has developed over decades. There have been many incidents in the past where there has been debate, discussion and a difference of opinion as well between the government and the RBI.

Let me just get down to substantive issues and one of the issues has to be on reserves. The suspicion on this was that the demand for reserve transfer was being made in an election year and that raised doubts on what it could be used for. Could it be used to fix the deficit or finance the pre-poll sops? There has already been a practice where additional surplus has been transferred since FY14,. Why fix what is not broke?

On this particular issue I want to directly challenge Mr Chidambaram who has been very vocal and I would say quite inflammatory in his comments. hose of us who take these matters very seriously and I am sure Mr Chidambaram does as well, recognise that when we talk about the institutional framework of this country, we have to be deliberate and mature and thoughtful in the manner in which we express ourselves to the media and to the general public. What has transpired in the RBI board discussions is that it has been agreed that there will be an expert committee that will deliberate on this matter of economic capital that the RBI needs to have.

I would like to remind Mr Chidambaram and all of your viewers today that it is a discussion of the economic capital and the reserves that the RBI should have is not a discussion that has just started today. It is not there to address the fiscal deficit or any other short term issues. This has been a long running discussion. When I was in the Finance Ministry, we had multiple rounds of discussions with the RBI as to what the appropriate level of economic capital for the RBI should be. We all agree that the RBI should have a fortress balance sheet, the RBI should be prepared for every contingency. But then again we have to look at other fortress central banks, other central banks that are very well provisioned when it comes to their capital reserves and applying those benchmarks and see whether there is an opportunity to be able to move some of the reserves to other purposes.

I am not necessarily even saying that it should come to the budget. There are many other purposes like recapitalising the banks or putting money into a sovereign wealth fund. Many ideas have been mooted as far as this is concerned. This is a long running discussion. It it is part of this discussion that we would like to proceed with the RBI to establish what an appropriate reserve level should be and it has to be done in technical manner with experts getting the best advice around the world as to what RBI should be maintaining in terms of its reserves. Therefore, to jump into this from a very political perspective to use inflammatory rhetoric. I do not think is something reflects well on senior policy makers.

I am glad you believe that technical advice is required on this. Let us talk about the prompt corrective action (PCA) framework. The RBI has agreed to review the prompt PCA framework for weak banks. We have blamed the RBI for looking the other way when NPAs got created in the previous regime are we making them do that all over again?

Lending and lending to good borrowers is something that all of us believe in. Nobody is saying in any way that you need to dilute your underwriting standards. Obviously, those have to be maintained and because they were not maintained in the past. Mr Chidambaram knows that better than anyone else. We have landed ourselves in the mess that we are right now with these banks because of the massive amount of NPAs they have had because of their vey lax underwriting and credit standards.

Nobody in any way is saying that we should relax that. The honourable prime minister, the honourable finance minister have repeatedly said that. That being said, we do have to have credit flowing into the economy. We are growing at an 8% plus rate in real terms, inflation is running between 3 to 5% and nominal growth is around 12-13-14%.

When nominal growth is running at 12 to 14%, our credit should be growing faster than that and we need to be able to ensure that we can provide credit to our legitimate borrowers, to our good borrowers and therefore we need all our banks to participate in that. As Mr Gurumurthy has said, we are a bank-led economy by and large, when it comes to financing and therefore the role of the banks is very important. The banks are taking on these deposits and are flush with deposits. They have taken on these deposits but at the same time they cannot lend. They have to lend with the right underwriting standards and this is part of the tight liquidity that we have in the financial system right now, where credit growth is not moving as quickly as it should. It is the time to think through all the options and to consider if we can really accelerate growth even further.

One of the things that the RBI has also agreed to is consider a restructuring scheme for stressed loans in the MSME space. Moody’s has red flagged that move stating that such relaxations and if I may quote them, “have largely been unsuccessful in addressing the underlying stress.” They go on to say how this makes lending far difficult and underestimates the extent of underlying asset quality. Would you take that concern on board?

I mean, of course, it is for the people who are handling these issues to be able to decide exactly how they want to proceed but anybody who is in a policymaking role recognises that it is a multidimensional situation. You do want to be able to provide appropriate relief for borrowers if indeed they are in stress but at the same time, you have to ensure that you are not overly relaxing your credit standards and weakening your banks further.

So, obviously, it is a multidimensional problem. You have to look at it case by case and this is part of what the RBI will need to do to come up with appropriate mechanisms the appropriate protocols by which more credit can flow into the economy. At the same time, one has to recognise where that loan will not come back. That is for the RBI to do.

At the same time, what we in government are doing are working on establishing a supportive policy environment in industry after industry to relieve the stress that exists in some of these industries. You can see what we have done for exporter refunds and what we have done for ease of doing business. You have seen what we have done for MSMEs.

In the aviation sector, for example, we are working on creating a supportive policy environment. So the government has a role to play in terms of the policies for the different industries, RBI has a role to play in terms of the credit standards and the kind of restructuring parameters that they put in place.

Should PSU banks be asked to put on loan melas? I am quoting somebody you know rather well, former finance minister Yashwant Sinha. There was no word on NBFC funds crunch. Are you surprised that NBFC and a lifeline for them was not discussed in this meeting?

I am sure it was discussed at length because this is a very urgent matter. What the policy action on that should be perhaps is still being worked out. As far as the government is concerned. we have already undertaken certain policy actions. But again as I was saying earlier. you have to understand the current context.

In the current context, because of IL&FS. we have had a liquidity shock in the market. When a situation like that happens obviously everybody pulls in their credit, everybody pulls in what they are putting out in the market and so we have a situation where there is a tightening in the market. Under those circumstances, you have to do certain unconventional things.

You have to ensure that there is sufficient liquidity on the wholesale side where the NBFCs are borrowing and I will very much want to emphasise this because I do not think people are paying enough attention to the disbursements side. Even though we have to worry about the wholesale financing and the liquidity side on the one hand, we have to be equally concerned about disbursement because if NBFCs are hoarding cash now and strengthening their loan books, their disbursements will go down.

When disbursements go down on the lending side, that is the life blood of the economy, particularly for the MSME sector. When the disbursements dry up because you are being very careful and very prudent, then you really start to choke the economy. That is a very serious matter. We have to work on the wholesale financing side and we have to work with disbursement side as well.

Two more contentious issues and one of them of course, is liquidity for the NBFCs and the supervisory committee that should be set up to oversee RBI decision making. These are two contentious issues. One believes this is simply a ceasefire of sorts that we have seen. Do we expect fireworks on the 14th of December or do you believe the display of maturity one hopes will continue on both sides?

I am sure the media wants headlines and you will whip up the fervour. But we have a very eminent, very thoughtful, very capable board, we have really good solid experts, very experienced people at the RBI and whatever the issues might be, there is a healthy and constructive tension between the speed at which government wants to deal with the issue and the way RBI would like to deal with certain matters. All of that will have to worked out. The right people are having the right discussions and I am sure we will see the right outcomes as well.