#dnaEdit: Drab policy direction

The latest bimonthly monetary policy statement of the Reserve Bank of India (RBI) in itself was a non-event. The policy direction — by and large — went as expected. Clearly, the RBI  is caught between a rock and a hard place.

The narrative is  familiar.  Inflationary pressures are still strong. The economy is still not mended. The RBI admits a need for greater investment and economic activity. The question is: how do we  turn the situation around? 

In his post-statement conference, Governor Raghuram Rajan, provided further insights into his predicament. The RBI inflation model, despite reduced inflation, has predicted a 7% rate of inflation. The governor has given precedence to his own judgment in assessing inflation rather than going strictly by the model forecast. Thankfully, we have been spared yet another round of interest hike. But then, could Governor Rajan not have been shown a little more courage and reduced the interest rate?  After all, commodity prices are falling, including those of imported oil and coal. Now that the economy has crossed the hump of summer, vegetable prices should  show a softening trend. Traditionally, in the winter months, the prices tend to wind down.  That should have made the monetary policy a little more exciting. But Central bank governors, it seems, do not play for excitement.

However, given that the policy direction has been drably conservative, some issues raised by Rajan merit closer introspection. It’s important to draw attention in this context to the recent Supreme Court coal scam verdict which is going to impact public sector banks in a major way.  Although the Reserve Bank has refused to give out any firm numbers, it is believed the PSU banks have lent Rs5 lakh crore to the coal and power sector. Some of that money could now become non-performing. Who will bear that cross? After all, the banks had given the loans against the coal licences, which carry the imprimatur of the government of India. If that is rendered devoid of value and is prone to cancellation, what are the means left to secure the banks’ money?

Governor Rajan has underlined the need to recognise this problem. He has said that the assets on the ground must become earning assets, suggesting that the government should make good the losses on this account. The finance ministry earlier suggested that the RBI should allow preferential provisioning norms for these assets — something the RBI doesn’t favour. Merely given a grace period for provisioning  bad coal loans can hardly be an adequate solution. 

Maintaining the viability of India’s public sector banks should be sacrosanct. They are the foundation of people’s confidence in the financial system. What is the good of financial inclusion or the Jan Dhan scheme  for that matter, if the existing PSU bank customers suffer? The ordinary people keep their hard earned savings in these banks and any losses they may incur, would deal them an irreparable blow. 

These aren’t undue fears. Successive governments have tended to treat the PSU banks as their territory. They have arm-twisted banks to lend to inviable projects. One banking minister was known to have held loan melas, where bank monies were distributed among selected people. Last year, government directed PSU banks to lend Rs4,300 crore to sugar mills for purchase of sugar cane.  RBI should now follow up and find out how much of the money accrued through bad loans can be brought back to the banks.