Reserve Bank of India (RBI) governor Raghuram Rajan believes that the sentiment has changed a lot after the new government took over and that stability is key to this sentimental improvement. He also feels that India is well positioned to take advantage of the global scenario and rate cycle right now. In a candid interview with Mihir Bhatt of Zee Media Corp, Raghuram Rajan shares his views on the RBI's monetary stance, India`s growth prospects, inflation and much more.
The whole country is in an optimistic mood right now, but when do you think the "acche din" will come for borrowers?
I think the "acche din" for borrowers will take some time. You know that to offer cheaper lending rates, even the FD rates will have to come down. In the current inflationary scenario I don’t see this happening. We will also have to look at the monsoon season progress, food inflation and crude prices. So there are many parts to this.
Can we expect rates to fall by the end of this fiscal?
I think first and foremost, the inflation has to sustain at lower levels. I don’t want a situation where we cut rates in pressure and then the demand spurt causes inflation to spike again. This would result in the RBI once again having to take a relook at the rate cut. That’s why I have said lets fight the inflation once and for all.
Do you think the government is moving in sync as far as managing growth and fiscal consolidation is concerned?
The budget had a lot of positives. The target of 4.1% on fiscal deficit is a challenging but reasonable target. Had growth been higher, this would not have been such a challenge. The new government's initiatives on the Goods and Services Tax (GST) and expenditure commission reforms are encouraging. Also keeping the Minimum Support Price (MSP) in check on various commodities is a move in the right direction.
What are you picking up from the bankers considering they sense the pulse of the economy in real time?
I would say the retail credit demand is pretty strong. The demand for credit for large projects is still low. But they typically take time to revive and with the government's focus on infrastructure I think this should start picking up by the end of this calendar year. The cut in the Statutory Liquidity Ratio (SLR) and relief in bond markets are steps by the RBI to keep this momentum in the right direction.
What’s your take on the recent arrest of the Syndicate Bank chairman and managing director (CMD) under bribe charges? Without being an attempt to generalise, is it a concern? Does the governance in PSU banks need overhauling?
Like you said I don’t see problems in all PSU banks. Some of them are doing extremely well and even better then private banks in case of recovery etc. But we need to change the basic framework in which a CMD operates. First of all he needs to have a longer tenure than a few months which is the case right now. They should have atleast three to five years in hand to implement a vision. Also the post of CMD needs to be split. The chairman can be non-executive and the MD – CEO can manage banks professionally. Also, we need to strengthen the board with more efficient independent board members. In case of PSUs, a lot of external forces are at play in decision making. This has to stop. The decision making has to be based on merit. Yes, there are national interest obligations for PSUs, but they can't be at the cost of the bank's balance sheet. So while a PSU can and should fund a project, maybe at a thinner margin compared to a private bank , but the project viability has to be kept in mind at all times. Banks also need to hire better talent at the mid-level, which has stopped. Pay scales in PSU banks need to improve urgently. Maybe not at par with private players, but there is a case for improvement. There clearly is need for closer supervision of PSU banks in operations, but that doesn’t mean that they are doing nothing right at present.
Will the RBI help achieve this?
PSU banks are owned by the government of India. We can recommend and we have done that already. All the measures mentioned by me are with the government and it is up to them to act on it. It’s a relative thing. In 2008, these same PSUs were better than private banks. But that was a different time. Today, they do have more non-performing assets (NPA) because of their funding to projects which could not take off.
Are NPAs the fault line in the Indian banking system?
I wouldn’t say it’s a fault line. A lot of NPAs will start unwinding as stuck projects start moving. But banks need to very vigilantly look at resolving existing NPA issues.
What about willful defaulters? Are you working on steps to choke their funding pipelines which are often misused?
Yes. We are in the process of introducing measures which will curb limitless fund raising by willful defaulters. We have seen cases of promoters borrowing money and using it for purpose other than mentioned. They have even transferred it to other companies in some cases. It makes no sense if a willful defaulter is defaulting on bank loan and raising money in the capital market or somewhere else. This needs to stop and we are working towards that.
Finally, what’s your take on the promised "acche din", the global scenario and India’s love for importing gold?
The sentiment has changed a lot after the new government has taken over and stability is key to this sentimental improvement. But we need to remember that things don’t change overnight. As far as gold imports are concerned, I think it will be some time before we see some of the restrictions on gold imports removed. The Current Account Deficit (CAD) will have to be down consistently.
What about the global scenario?
Every year we start on an optimistic note and this year was no different. But the first quarter US economy numbers were not encouraging at all. There are a lot of factors from Ukraine to Gaza to crude oil to the recovery and finally the rates going up. But I strongly feel that India is well positioned to take advantage of the global scenario and rate cycle right now. I am much more confident about India at this point compared to global prospects.