It is useful that the memoir of former Reserve Bank of India’s (RBI) governor, Dr Duvvuri Subbarao, was released in the middle of impassioned debate about a second term for Dr Raghuram Rajan. Thanks to Dr Rajan’s rockstar-like status, the chatterati and the socialite has as many views about RBI, its autonomy and the appointment and independence of its governors, as economists, policy-makers and commentators. Dr Subbarao’s book Who Moved My Interest Rate is, however, a better way to carry this debate forward.
The bulk of Dr Subbarao’s book is about RBI’s role as the monetary authority of managing inflation and interest rates to ensure adequate supply of credit to enterprises at the right price. This is unsurprising. RBI, as an organisation, is so focused on these issues that a posting in the monetary policy department is considered vital to an eventual promotion as executive director or deputy governor. This column is going to focus on the other roles and responsibilities of RBI, some of which Dr Subbarao skims over. We do this in the context of his own assertion that RBI and its governor ought to be a lot more accountable to the public and to the parliament than the current practice of the standing committee of parliament “summoning the governor on specific issues” three or four times a year.
Dr Subbarao is emphatic that such “sporadic and voluntary mechanisms for accountability are inadequate” for a “public policy institution (he omits regulator and supervisor) with such a powerful mandate.” He says that RBI’s accountability must extend beyond the February 2015 agreement with government to target inflation and must include a statutory, US-style mechanism, where the governor appears before the standing committee at least twice a year and responds to questions on polices and their outcomes. Let us look at how RBI would have fared had Dr Subbarao been questioned by knowledgeable parliamentarians in a televised testimony (let’s copy the US system all the way) on several issues that are barely discussed in his book. Consider:
RBI’s Role as Regulator and Supervisor of the Financial System: RBI has always enjoyed a Teflon-coated existence when it comes to its role as a supervisor, despite many scams over the decades. It always comes in to investigate and penalise and is never held accountable for missing the problem. Non-performing loans of banks, now estimated at a massive Rs8 lakh crore ballooned after the 2008 crisis when the central bank asked banks to give industry a breather. Banks as well as RBI should have ensured that this leeway wasn’t misused by large borrowers for repeated restructuring of loans or to default on their payment obligations. This did not happen. Dr Raghuram Rajan has now raised this issue at an RBI conference 27th July saying, “As with inflation, it was the duty of the central bank to press for bank clean-up earlier, when few among the public support the central bank’s activism.” Indeed, RBI got serious about this well after bank unions finally went public, in November 2013, with slogans such as ‘stop the loot of public money,’ ‘kick out bad loans before they kill the banks’.
Burgeoning bad loans were surely a big issue when
Dr Subbarao completed his term in September 2013; but the book makes no mention of it. Instead, he devotes several pages to the “blow up in the microfinance sector” under his watch, led by his home state of Andhra Pradesh. Here, too, his observations are limited to his actions to manage the crisis, without addressing why RBI, as a regulator, failed to notice the usurious loans and entrapment of borrowers through multiple loans even though a spate of loan-related suicides were widely reported by the media, long before the crisis blew up.
Similarly, there is an elaborate segment on the Saradha scam which was a collective investment scheme rather than a chit fund. Regulation of these schemes is under the Securities & Exchange Board of India (SEBI), but the Saradha scam figures in the book because of what he said in a deposition before the standing committee. “I admitted to the committee that our balkanized regulatory structure in the non-banking financial space, straddling so many different regulators and regulations, was bewilderingly complex and confusing with regulatory overlaps and cracks,” he writes. Dr Subbarao dubs this a policing failure rather than a regulatory failure and claims that these collective investment schemes operate below the regulatory radar. At the risk of using rather strong words, this is certainly not true. Companies such as Saradha, Sahara, Rose Valley and Pearls flaunted their endless wealth and powerful political connections in the face of the public, the media and the regulators. RBI wasn’t looking, while SEBI struggled because they successfully gamed the judiciary to avoid action.
A high level coordination committee on financial market (HLCCFM) regulators, presided over by the RBI governor, existed to deal with such cracks and regulatory overlaps. But Dr Subbarao clearly failed to provide appropriate leadership in this role. This is also evident in another episode with serious consequences. Dr Subbarao writes that a turf battle between SEBI and IRDAI (Insurance Regulatory and Development Authority of India) on regulating ULIPs (unit-linked insurance products) almost led to a statutory mechanism to handle disputes between regulators. Why did the HLCCFM did not address and defuse this issue before it blew out of proportion? We don’t know.
RBI’s Role in Managing India’s Forex Reserves and Currency Management:
Dr Subbarao has a short chapter on the subject which is mainly an interesting episode about RBI’s highly secret operation to purchase of 200 tonnes of gold from the IMF in 2009. The Bank was praised for a ‘hedge fund like operation’. On the larger issue of forex management and how it is conducted, Dr Subbarao insists that RBI’s disclosures of sensitive forex data is in line with international best practices. But many high-level insiders admit that there is very little accountability in these operations or assessment of the cost of RBI’s actions and decisions to stabilise currency which is ultimately borne by the exchequer.
Role of the Directors: Good governance norms require that RBI’s board of directors, especially the outside directors (who are presumably independent directors) to ask detailed questions. This does not happen. The criteria for selecting these directors is also a mystery. RBI itself has resisted putting out any details about its board meetings, despite an order of the Central Information Commission to disclose at least the board minutes and notes.
The Ivory Tower: Dr Subbarao attributes a very interesting observation to prime minister Manmohan Singh (p 237) who asked him to keep his ears to the ground. He writes, “At the same time, here was also much truth to what the Prime Minister had told me. The Reserve Bank is an insular institution with not much public interface.” This accurate insight led to an outreach programme where top management held town hall meetings and visited villages. But this insular attitude is exactly why RBI has been caught napping on so many scams or cannot come up with a user-friendly know your customer (KYC) rule.
Ignoring the Consumers: To me, a significant omission in the book is the absence of any mention of the middle-class consumer, who is preyed upon by banks to liquidate safe fixed deposits for expensive ULIPs, mutual funds, gold coins, hybrid derivative instruments or enter into ‘wealth management’ schemes that decimate their savings. The only interaction with these consumers was through Dr KC Chakrabarty, who he had stripped off most portfolios (barring four) for five long months as a punishment for his outspoken views on interest rate management. Ironically, the customer services department did fairly well under his watch. It was then that RBI began to draft a comprehensive consumer charter, which Dr Subbarao’s successor announced but has failed to implement in his entire three-year tenure.
Dr Chakrabarty tells us that, despite that sordid episode, Dr Subbarao was not only impeccable in his inter-personal dealings with him, but also backed him strongly on all the major pro-consumer actions. The omission, however, means that we will have two successive governors—Dr Subbarao and Dr Rajan—who have all but ignored the issues of growing middle-class consumers.