What led to Urjit Patel’s premature exit from the RBI? Inside his tell-all book

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MUMBAI: Why did Urjit Patel quit as Reserve Bank of India governor in 2018 before his term was over? As befits a former central banker, there’s no definitive answer in his new book but there are clues. Vested interests and the political establishment’s waning interest in tightening the screws on errant companies in the wake of the Insolvency and Bankruptcy Code (IBC) may have sowed the seeds of discontent.

“The disposition with respect to the IBC or, more generally, in the conviction in the pathway, perceptibly changed – conceivably on defensible grounds – in mid-2018,’’ Patel writes in Overdraft: Saving the Indian Saver. “Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued. A case of our old failing of a premature pronouncement of victory, perhaps? Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency.”

Having taken over from Raghuram Rajan in 2016, Patel became the second governor in RBI history to resign prematurely over perceived differences with the government, which was seen as meddling in policy issues that were in the domain of the central bank. The finance ministry and the RBI were shadow boxing over a range of issues—among them, declaring a borrower a defaulter the day after missing a payment; keeping state-run banks under Prompt Corrective Action (PCA) curbs that restricted their lending; and transfer of excess capital from the RBI to the government. The government invoked the never-used Section 7 of the RBI Act that allowed it to give directions to the central bank on policy issues, which was regarded by some as trespassing on its autonomy.

The book, which deals mostly with policy matters and the stability of the banking system, reflects on the corporate lobby groups that influence policy making and dilute even the good intentions of administrations by peddling trumped-up fears.

“The IBC/NCLT (National Company Law Tribunal) is, for defaulters, about as welcome as Kryptonite is for the comic-book hero Superman,” Patel writes.

The RBI followed up the reformist IBC with a circular on February 12, 2018, that plugged gaps in the law and made it tough for bankers to camouflage rotten assets. Power companies challenged the circular in the courts.

“Sector interests with aggregate exposure of around Rs 2 trillion started a legal onslaught on the RBI’s regulation by filing petitions for stay in multiple high courts around the country,” according to the book. “Sowing disorder by confusing issues is a tried-and-trusted, distressingly often successful routine by which stakeholders, official and private, plant the seeds of policy/regulation reversal in India; this has been the case for as long as I can remember.’’

While Patel’s book doesn’t point fingers at any individual or blame any institution for the events that unfolded, a particular episode in the regulator’s battle with lobbyists shows how even professionals left the central bank in the lurch.

“From July 2018 onwards, the IBC was felt, at least by some lobbies, to be constraining, that is, too strict on borrowers in terms of regulatory timelines and the consequences thereof,’’ he writes. “Lawyers who had agreed to represent the RBI in the Supreme Court (SC) dropped out at the eleventh hour, literally the night before the hearing.’’

Patel, who had blamed the RBI for being lax in policy making before becoming a deputy governor in 2013, does not skip over inadequacies at the watchdog he once led, pointing to its perception as a “soft regulator.”

“The regulator fell short on several counts in the period leading up to 2014,” he writes. “It failed to challenge assumptions through, for example, more rigorous stress-test scenarios at bank level, as well as sensitivity analysis on (demand) assumptions, and sector (policy) risks. The scale of exposure – or risk build-up – was not appreciated enough and contested by the regulator to effectively slow down or tighten the lending norms. High professional integrity notwithstanding, the RBI’s reputation has been that of a soft regulator – deterrence has been undermined.’’

Easy credit from the middle of the 2000s was at the centre of the bad loan mess that was getting cleaned up from 2014 under Rajan.

“The lending cycle/asset build-up started in the mid-2000s and even through the global financial crisis, we kept lending channels wide open,” Patel says. “There was a (systemic) failure to maintain balanced credit expansion; The reasons for the growth in the NPAs (non-performing assets) are also not far to seek.”

Patel’s view is that the government made transformative reforms but may be squandering the opportunity afforded by this to bring order and end crony capitalism.

“The government of India has to be lauded for instituting landmark reforms in the areas of monetary policy and fiscal federalism,” he says, recalling one of his rare public speeches. “One cannot and should not underestimate the sagacity and uncommon courage of the government in undertaking reforms that can only be described as truly transformative. These will shape, for the better, our economic evolution in the years and decades to come.”

Patel says there’s reason to be upbeat but also offers a warning.

“While there may be grounds for remaining warily optimistic, in the sense that we will not completely reset the clock to pre-2014 despite setbacks in 2019 and early 2020, we have to be vigilant that U-turns don’t usher a serial bout of ever-greening and zombie borrowers; otherwise, victory over crony capitalism will, at best, be short-lived, and that the limited progress so far could turn out to be a false dawn.’’

Anyone looking for revelations about the snap demonetisation of 2016 is apt to be frustrated. Patel recently made a comeback to the policy making circuit, which may have surprised some, given the nature of his 2018 departure. He took over last month as chairman of the National Institute of Public Finance and Policy (NIPFP), succeeding Vivek Kelkar.

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Tagged IBC, raghuram rajan, , Reserve Bank governor, Urijit Patel

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