Banks and Business Houses

 RBI seems to be considering permitting NBFCs and large corporate / industrial houses to promote new commercial banks. This has been described as a 'bombshell' by Raghuram Rajan and Viral Acharya. They argue that such houses are themselves big borrowers and we cannot expect them to choose good borrowers and therefore credit quality of banks would suffer.

This criticism is debatable and is one-sided. Though it is fashionable to condemn large industrial houses as purveyors of corruption and spewers of malpractices, facts do not bear this out. Fourteen banks were nationalised in the year 1969. Prior to this, many of these had been promoted by industrial groups. Central Bank of India, UCO Bank, Indian Bank and Indian Overseas Bank had industrial houses as their promoters. They were doing well; therefore, the government did not have any problem in managing them. They became sloppy and corrupt subsequently because of political interference.

The private banks which went under had been promoted by 'eminent bankers'. Global Trust Bank (Trust was an oxymoron here) and Yes Bank (Yes for mismanagement?) were the babies of Ramesh Gelli and Rana Kapoor, both banking doyens. They got banking licences because they were professionals and not industrial / business magnates. They taught industrialists how to be corrupt!

Thus there are examples to show that the problem is not with industrial houses. It lies elsewhere. If potential promoters are not subjected to strict due diligence, whoever they are, banking mishaps will happen. Industrialists at least know the difficulties faced by businesses and as bankers they will not be indifferent to customers. To dismiss them as fraudulent as a group is a sign of unpolluted prejudice.

RBI's former Governor and Deputy Governor could have proposed better due diligence before sanctioning licences to open banks. Unfortunately they have chosen to mouth populist condemnation of businessmen and industrialists. This goes to show that what is ailing us is a closed mind. Any attempt to open it will spontaneously evoke cynicism and contempt.

Economics Nobel

Clarivate Analytics has announced a list of six probables for Nobel prize in Economics 2017. CA has become a household name in India because it has included Raghuram Rajan in the list.

The list contains Colin F.Camerer, George F.Louwenstein, Rober E.Hall, Michael C.Jensen and Stewart C.Myers in addition to RR. The first two are neuro / behavioural economists, the third one has researched unemployment, recessions and worker productivity. The other three are known for their brilliant work in corporate finance. In addition, Raghuram Rajan retrospectively mesmerised the world by having predicted the 2007- global economic meltdown / tailspin.

In case RR wins the Nobel which he richly deserves, the opposition in India will be gifted with a massive ammunition which it does not deserve to lambast the government for having spurned RR away from RBI.

Raghuram Rajan's legacy

As Raghuram Rajan demits office today (Sept.4th), it is tempting to dwell upon his achievements and failures though it may well be argued that it is too early to know the consequences of Rajan's actions as Governor as one of the most respected central banks in the world.

He has his share of admirers and critics. But no one can contest the fact that he made RBI Governorship more visible and more audible.  His argument that the Governor had a duty to be articulate on issues economic and quasi-economic may not have many takers. However, he religiously practised what he claimed was his duty.

He focused singularly on containing inflation. The government constrained him (most probably, he loved this constraint imposed on him) by holding him accountable to the single target of 4% plus or minus 2% inflation p.a. This was manna from heaven for a monetarist like Rajan. He made it appear as if he had a cross to bear and therefore he was forced to be insouciant to the need for growth.

Rupee was tumbling when he took charge. He stabilised it through innovative FCNR schemes. However, Rajan said oftentimes that these schemes were not his idea. He created many schemes for revitalisation of stressed assets. Results of these schemes could not have delighted him. He forced more transparency on commercial banks. Dirty linen became public but was not cleaned. Rajan was attempting a Sisyphean task.

Rajan's contribution towards turning the economy around may not be obvious, at least as yet. Still his willingness to attempt some bold steps like confronting the NPA problem head-on and making the banks more transparent which were not in the radar of former Governors deserves our gratitude.

Raghuram Rajan's departure

"He Came, He Saw, He Conquered" and He Left. He was animated, exuberant, stylish and articulate. He gave expression to his views without reservation and this probably was his undoing also.

Leadership of central banks requires clarity of thought and obfuscation of expression. Raghuram Rajan excelled in the former and was incapable of the latter.

Rajan seems to know when to leave. He has chosen to depart when economic climate is more bright than dark. He has not allowed his admirers to discover his feet of clay. RBI Governor's success depends more on circumstances and less on his / her brilliance. Deciding to leave when circumstances are fairly healthy is a master stroke.

RBI Governors in the past have generally been given two terms. Being restricted to one term with rampant rumours of a conspiracy against him means that Rajan gets sympathy in addition to admiration. This is indeed the Goldilocks time to let go of the Governorship.

Some may call him a quitter. His mom-in-law who wants him to be a karma yogi will not be happy with his decision.

Subramanian Swamy goes about blaming Rajan for his allegedly hawkish stand on interest rates which according to him has distressed many industrial units. But, leaders of industry have almost unanimously regretted his early departure. Swamy's argument flies in the face of empirical evidence.

Rajan's best legacy is what he did to banks' Balance Sheets and wilful defaulters. It is hoped that his successor will emulate him on this. His successor (Rakesh Mohan, Arvind Panagariya, Arvind Subramanian, Arundathi Bhattacharyya or who?) will have a tough time because the benchmark will be Rajan's methodical performance.

In his farewell message to RBI employees, Rajan says he is always available to serve the country. The country needs him now more than ever and he has chosen to walk back into distant academia. Of course, no one is indispensable. We will get over Rajan-mania sooner than expected.

Raghuram Rajan's atypical optimism

RBI Governor, Raghuram Rajan, is known for his balanced views and measured statements. It is surprising, therefore, that he has now waxed eloquent on India's prospects.

"India could be on the verge of a revolution; everything is in place for a leap in production, whether it is in manufacturing or services." "Our young generation is willing to take the best of the world along with it."

It is worth remembering Alan Greenspan's words ("I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said.")

Have we understood Rajan clearly? We need not be surprised if he comes up with a clarification.

Raghuram G.Rajan

Dr.Raghuram Rajan, the Governor of the Reserve Bank of India, has been elected as Vice-Chairman of the Board of Directors of the Bank for International Settlements (BIS). This is yet another indication of the respect monetary authorities all over the world have for Dr.Rajan. Winner of many international awards for his outstanding contribution to Financial Economics, he is the author of the cautionary treatise, “Fault Lines – How Hidden Fractures Still Threaten the World Economy”.

His exceptional prediction of the 2008 global economic crisis (called the Great Recession) was a true feather in his cap though at that time many leading economists dubbed his views obscurantist. Lawrence Summers, a note-worthy economist cum administrator criticized  "the basic, slightly lead-eyed premise of [Mr. Rajan's] paper to be misguided." Others called him  an “antimarket Luddite, wistful for old days of regulation.”  Subsequent events proved Dr.Rajan’s clairvoyance and his detractors looked foolish.

Of late, he has been pleading for better coordination among central banks to ensure that we don’t easily slip into some unintended economic crisis. In particular, he is advocating early withdrawal from unconventional policy measures like quantitative easing. He is not against such measures per se, but he cautions that continuation of these for a longer time than necessary is fraught with grave risk to the financial system. No economist would dare to question him now.

This is the first time that an Indian is elected as either Chairman or Vice-Chairman of BIS. This is an occasion for us to get to know some details about BIS.

Chairman of the Board is Dr.Jens Weidmann who is also the President of the Deutsche Bundesbank. Interestingly, Weidmann is only 47 years old and younger than Rajan who is 52. The Board consists of 21 Directors whereas 60 central banks are members of BIS. BIS was established in the year 1930 at Basel, Switzerland under the Hague Agreement. The signatories to this Agreement were the central banks of Belgium, France, Germany, Italy, Japan and the United Kingdom and a financial institution representing the United States.

There was a threat to the existence of BIS in the year 1944. The United Nations Conference in Bretton Woods which agreed to the creation of International Monetary Fund (IMF) and the World Bank also adopted a resolution calling for the liquidation of the BIS ! Fortunately, the resolution was put aside in 1948.

Earlier, during the World War II, BIS  temporarily moved from Basel to Chateau-d’Oex following the outbreak of hostilities between Germany and France.

What does BIS do?

BIS undertakes research and analysis of policy issues for central banks and renders consultancy services to central banks in management of foreign exchange and gold reserves.

It played a dominant role in formulation of Basel documents II and III which seek to regulate the risk appetite of commercial banks through capital requirements, liquidity and leverage guidelines.

Governor vs Dy.Governor: Clash of views or tactical manoeuvre?

The Economic Times reported on 4th October that a decision has been taken to advise state-run banks to provide cheaper loans to fund purchases of autos and durables. The decision was taken at a meeting between Finance Minister, Chidambaram and RBI Governor, Raghuram Rajan.

The Hindu reports on 6th October that Deputy Governor of RBI, K.C.Chakrabarty has observed that "no one can force" lenders to selectively cut rates. He added, "It is not a prudent measure to increase consumption by lowering interest rates. Cheap loan plan can impact asset quality of banks".

What is really happening? Prima facie, it appears that Rajan and Chakrabarty have contradictory views on the proposed measure. If so, Chakrabarty need not have embarrassed the Governor by voicing his differing opinion publicly a la Rahul Gandhi. Chakrabarty is a mature person and therefore this interpretation is wrong.

What is more likely is that Rajan has been bamboozled by the minister into agreeing to his view. Despite his learning, Rajan is still a babe in the political woods and he is not yet Y.V.Reddy who could stand his ground whatever be the pressure on him. Has Rajan sought a favourable 'dissent' from Chakrabarty so that Rajan can stave off ministerial coercion?

Raghuram Rajan's maiden policy review

Raghuram Rajan looked much less sure of himself today (20th Sept.) while addressing the media after the mid-quarter review of monetary policy than he was immediately after taking over as Governor of RBI. Has the responsibility of the post mellowed him already? Has he started feeling the pressure of the Finance Ministry?

Wit and cheerfulness associated with him were absent though the FED has postponed the much feared tapering. In the event, he has played rather safe. He has reduced one rate (MSF / Bank Rate) and hiked another (Repo). The CRR daily maintenance by banks has been reduced from 99% to 95%

BSE Sensex has dived. Rajan's brief honeymoon is probably over. Rupee was less reactive. We will have to wait and watch.

The Governor seems to depend on one Deputy Governor (Urjit Patel) more than on other three DGs. Perhaps not a very sound policy! Indications are that he defers to Finance Ministry more than what independence of central bank can accommodate.

Raghuram Rajan

Raghuram Rajan has started off well in RBI with an initial statement that is both brief and meaningful. His determination to stick to what he perceives to be right comes out clearly from his reference to Rudyard Kipling's 'If ':

"If you can trust yourself when all men doubt you, But make allowance for their doubting too:

Kipling’s reference to “men” only dates these lines, but his words are clear."

Rajan's message is subtle, but clear. He is ready to be different from others and yet he will relentlessly fight against forces of exclusion. One cannot avoid the thought that a person like Rajan would be a lot more beneficial to the nation as, say, prime minister rather than RBI Governor.

The Governor is accurate when he says, " The Reserve Bank is a great institution with a tradition of integrity, independence, and professionalism." But when he follows it up by adding, " To the existing traditions of the RBI, which will be the bedrock of our work, we will emphasise two other traditions that become important in these times: transparency and predictability", he is perhaps unwittingly uncharitable to his predecessors. RBI has never been opaque in its functioning. Its decisions have generally been logical and reasonable and therefore predictable though not always to the liking of Finance Ministers.

Further, one does not start a tradition. One may start a practice and if it becomes consistent over a period of time it turns into a tradition.

What is the meaning of the following sentence?

 "The RBI will give out new bank licenses as soon as consistent with the highest standards of transparency and diligence." Rajan did pause for a while when he read this. Some word has apparently been missed out.

Will Raghuram Rajan make a difference?

RBI applies "Fit and proper" guidelines while considering important appointments in various banks. By the same token, there is no doubt that all its Governors so far (Manmohan Singh included) have satisfied this requirement. For example, no one will question the fitness of say Y.V.Reddy or Subbarao for this post. Raghuram Rajan is certainly a suitable successor. So his appointment as RBI Governor is unlikely to catapult the central bank in a different trajectory.

If he had replaced Manmohan Singh as our P.M., our fortunes would have changed for the better. This is of course an impractical wish. Making Rajan RBI Governor (without assurance of his independence) is like asking a Mercedes Benz car driver to drive a rickety bus on a patchy road towards a precipice in utter darkness.

Greg Mankiw and Raghuram Rajan

Nicholas Gregory Mankiw , Economics Professor at Harvard University, is associated with right-wing economists and supportive of Republican policies. He is well-known for enunciating "ten principles of economics".

He quotes Raghuram Rajan in his blog:

"SATURDAY, AUGUST 10, 2013

Wisdom from Raghu Rajan

"For economists who actively engage the public, it is hard to influence hearts and minds by qualifying one’s analysis and hedging one’s prescriptions. Better to assert one’s knowledge unequivocally, especially if past academic honors certify one’s claims of expertise. This is not an entirely bad approach if it results in sharper public debate.

"The dark side of such certitude, however, is the way it influences how these economists engage contrary opinions. How do you convince your passionate followers if other, equally credentialed, economists take the opposite view? All too often, the path to easy influence is to impugn the other side’s motives and methods, rather than recognizing and challenging an opposing argument’s points. Instead of fostering public dialogue and educating the public, the public is often left in the dark. And it discourages younger, less credentialed economists from entering the public discourse."

Read more at http://www.project-syndicate.org/commentary/the-declining-quality-of-public-economic-debate-by-raghuram-rajan#Xlo2wzGUe2FcbYDZ.99"

Paul Krugman, a liberal economist, had earlier mocked at Reinhart and Regoff for their goof-up in relating national debt and GDP growth. Rajan probably has in mind Paul Krugman and / or Amatya Sen and Jagdish Bhagwati while making the profound statement quoted above.

It is also possible that Rajan is politely referring to Lawrence Summers who had earlier impolitely called Rajan as "somewhat Luddite and mostly misled". It is better to be Luddite and forecast correctly than to be contemporary and erroneous in predictions.