RBI governor’s New Year missive to RBI staff promises radical change, but the odds seem to be stacked against him
“It has often been said that India is a weak State. Not only are we accused of not having the administrative capacity of ferreting out wrongdoing, we do not punish the wrongdoer, unless he is small and weak,” said Reserve Bank of India (RBI) governor, Dr Raghuram Rajan, in a New Year email to bank officers. Excerpts of the email have been published by The Economic Times and other media.
The governor goes on to say, “This belief feeds on itself. No one wants to go after the rich and well-connected wrongdoer which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop. Importantly, this does not mean being against riches or business, as some would like to portray, but being against wrongdoing.” As always, Dr Rajan’s words, and their expression, have a way of gladdening our hearts. The email reveals that in just over two years, the governor has, correctly, identified all the shortcomings or a sense of hubris that seems to envelop regulatory bodies in India. Here are some other issues highlighted by Dr Rajan, but paraphrased by me: lack of clarity in regulations; many ill-informed, complacent and self-styled officials who have no desire to improve themselves; extraordinarily slow and bureaucratic responses (a serious issue); and not adhering to timelines.
The letter also highlights the governor’s keen understanding of how the media works. He asks for better communication that highlights specific achievements or regulations rather than ‘starting with irrelevant history’. He wants press releases sent out by 5.30pm in order to show up in the press the next day. These observations are extremely interesting, because access to RBI’s top brass—and its external communication—has been under the iron grip one individual for 25 years. Criticism of RBI led to a denial of access to journalists and internal vilification, while amplification of its point of view ensured interviews, exclusives and tip-offs about press statements issued after newspaper deadlines. We are extremely keen to see whether this will change in the rest of Dr Rajan’s current tenure which ends in September 2016.
However, the issue of larger national importance is whether RBI, or the banks and financial institutions that it regulates, will dare to punish or act against powerful and mighty borrowers whose loans continue to be restructured with impunity through multiple corporate debt restructuring (CDR) schemes and under RBI’s 5:25 scheme (five-year moratorium on payments and a 25-year loan tenure), which has even been described as ‘The Great Indian Banking Ponzi Scheme’!
Significantly, the governor’s New Year email follows a landmark order of the Supreme Court of India (SC) which demolished the central bank’s frequent denial of information on the grounds of having been received from regulated entities in a ‘fiduciary capacity’. The apex court reminded RBI of “its statutory duty to uphold public interest and not the interest of individual banks” and also expressed surprise that RBI, as a ‘watchdog’, was not “more dedicated towards disclosing information to the general public” under the RTI (Right to Information) Act. Some of the apex court’s observations are a serious indictment of how RBI functions. For instance, the order said, “We have surmised that many financial institutions have resorted to such acts which are neither clean nor transparent. The RBI in association with them has been trying to cover up their acts from public scrutiny. It is the responsibility of the RBI to take rigid action against those banks which have been practising disreputable business practices.”
In these circumstances, can we hope that the governor’s brutally frank New Year missive promises a radical change in the central bank’s regulation, supervision and communication? Dr Rajan, with his formidable reputation and global standing, is certainly capable of reshaping RBI. But consider the odds.
Having just read the memoirs of DN Ghosh, a highly regarded bureaucrat and former chairman of State Bank of India, the task seems gigantic, if not impossible. The centrepiece of Mr Ghosh’s book, No Regrets, is a ringside account and superb narration of the three extraordinary days that forever changed the face of Indian banking with the nationalisation of 14 banks in 1969.
However, the most dramatic part, to me, is his candid account of his short tenure as the chairman of Larsen & Toubro, when he reversed a dramatic coup of the blue-chip engineering firm by Dhirubhai Ambani’s Reliance group in the late 1980s.
Mr Ghosh, who took charge of L&T at the instance of prime minister VP Singh, ensured that L&T remained an independent, professionally-run company, but not without being singed by Reliance’s machinations. For those who are too young to remember, the chapter on this sordid saga illustrates how powerful corporate houses control the government more effectively than the hundreds of leaked conversations of lobbyist Niira Radia with the movers and shakers of India.
Reliance acquired control L&T by getting Premjit Singh, the then chairman of Bank of Baroda, to accumulate a substantial shareholding from public sector entities (through a subsidiary called BOB Fiscal which was shut down) and transfer it to three Ambani entities. The venal heads of our powerful public sector financial institutions and the Controller of Capital Issues were a willing party to the coup, but did a swift about-turn to save their skins when VP Singh chose to halt the brazen takeover. They changed sides again as soon as Mr Singh’s government collapsed.
Mr Ghosh has done well to expose the brazen complicity of the top guns in government and their dubious tactics to get him to resign from L&T. The lures he was offered included an ambassadorial assignment (offered through the brother of Congress politician ML Fotedar) and the chance to give shape to an international bank (offered by S Venkitaramanan, the then RBI governor, who joined the Reliance board after his retirement). IDBI chairman, SS Nadkarni and N Vaghul, who headed ICICI, turned brusque in their attitude towards him. The LIC chairman, AS Gupta, not-so-subtly warned him of rough times and controversies. There was even a suggestion that his family could be harmed. The powerful West Bengal chief minister, Jyoti Basu, was also co-opted to convey Reliance’s view that he was being ‘obstructive’.
If that weren’t enough, members of L&T’s management committee began to receive investigation notices from the income-tax department. When Mr Ghosh approached the revenue secretary about it, he did not even bother with a denial. It later turned out that the secretary owned 50,000 shares of Reliance Industries. The bulk of the media was hostile, but a leading newspaper’s editor went so far as to have his correspondents ask for a meeting with Mr Ghosh, at which the latter asked if the editor was acting at the behest of S Gurumurthy (who had led The Indian Express campaign against Reliance for its owner Ramnath Goenka). Finally, finance minister Yashwant Sinha called for Mr Ghosh and told him, “Whichever post you have held, you have shown remarkable dignity and finesse. Sometimes circumstances become unfavourable and it is better not to allow it to tarnish your reputation.” DN Ghosh quit the next day, but his letter made it clear that he was leaving at the ‘request of the government’.
Nothing has changed in the past 25 years. If anything, the collusion between business and politics reached a new high under the United Progressive Alliance and even their roles had become inter-changeable as they worked to corner national resources such as coal, steel and telecom spectrum. It will require a lot more than a blunt email from the RBI governor to change the system. Does he have a game plan? Or is the missive a nice way of distancing himself from the mess that he is presiding over?
(Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected])