Raghuram Rajan, Former RBI Governor (Photographer: Dhiraj Singh/Bloomberg)

Sometimes, RBI Governor Has To Say No: Raghuram Rajan

Former Reserve Bank of India Governor Raghuram Rajan said that there are times when a central bank chief has to speak out on matters where he disagrees with the government.

Speaking at the launch of his new book ‘I Do What I Do’ in Chennai on Tuesday, Rajan pointed out that often people make the mistake of comparing the RBI governor with a bureaucrat working for the government.

In that duty (as RBI governor), you sometimes have to say no to pressures that come down on you. You are not quite in the place of a bureaucrat and the mistake that some people make is treat the RBI governor as yet another bureaucrat. Most bureaucrats don’t have the freedom to say no. They may say that this is not according to rules, but you as RBI governor have to make a judgement. 
Raghuram Rajan, Former Governor, RBI

Rajan was outspoken throughout his three-year term, with views not only about economic policy but also free speech and religious tolerance. In contrast, his successor Urjit Patel mostly speaks during monetary police announcements. In fact, he’s not said much publicly about demonetisation or how the decision to scrap old high-value currency was taken a few months after he took charge from Rajan.

In his book, Rajan has said that he had warned the government that short-term costs of demonetisation would outweigh benefits. While not directly referring to the note ban, Rajan on Tuesday said the RBI governor has the option of stepping down if a decision is forced on him.

While the government has the power to tell the RBI to do what it wants, a central bank chief also has the option to tender his resignation, if he disagrees with the government’s decision.
Raghuram Rajan, Former Governor, RBI

Earlier at the book launch, Rajan also pointed out that cleaning up the banking sector was the single biggest job pending with the regulator to ensure that smooth flow of credit is restarted.

“I think before we impose yet some more change in the public sector banks, it is extremely important that they clean up their balance sheets and get back into the business of lending because that clearly is holding up the economy.”

During his tenure, the former RBI governor had initiated a number of steps to ensure that banks are forced to recognise bad loans. Most important among these was the asset quality review of October-December 2015, when it asked banks to provide for a number of stressed loans and classify them as non-performing assets. The gross bad loans of the banking system have since almost doubled. As on June 30, Indian banks gross NPAs had exceeded Rs 8 lakh crore.

The Insolvency and Bankruptcy Code is now a major tool which could help resolve this stress, Rajan said. During his tenure, the RBI was pushing banks to resolve assets without the support of a strong legal mechanism, he said.

Rajan also batted for protecting public sector bankers against any adverse scrutiny by investigative agencies for taking difficult commercial decisions.

In January, the Central Bureau of Investigation arrested former senior IDBI Bank officials in the Kingfisher Airlines Ltd. case, citing malpractice. Bankers then stopped taking final decisions in a number of key stressed cases.

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