RBI’s
accountability
When
it became clear that Yashwant Sinha was on his way out as finance
minister, a host of aspirants, thank media, were able to register
themselves as potential candidates for the prestigious post. Among
them were Dr.C.Rangarajan and Dr.Bimal Jalan. Subsequently Dr.Jalan
was reconfirmed as RBI governor for an extended period of two years.
Dr.C.Rangarajan’s name popped up often till better consels
prevailed in Delhi.
 Though
he is out of the race, it is academically right to examine his
credentials and records. For the former RBI governor remains a
symbol of the lack of accountability which is the bane of Indian
polity and bureaucracy. In India, unfortunately we don’t have a
system or legal device to evaluate the working of executives /
technocrats heading key institutions like RBI, CBI, chairmen of tax
boards etc. It needs a newspaper story or an overenthusiastic CBI or
ED official to outsmart them. And even the sharp cross-examination
by parliamentary standing committee was unproductive. Top level
officers has shown remarkable survival capacity in such
circumstances. Dr.Rangarajan is one example.
Before reaching the Mint Road, Dr.Rangarajan was a distinguished
professor of economics, specialising in areas shunned by average
students and teachers of the subject. His ability to sort out
complicated formulations was well known. Strangely those qualities
evaporated on his migration to the RBI towers. Though he had no feel
of politics he was evidently feeling the heat of political pressure
as deputy governor. He was one of the two senior officers overseeing
the Credit Authorisation Scheme (CAS) instituted by the then prime
minister, Indira Gandhi. Banks had to refer every loan application
cleared by them for $100,000 and above to the apex bank. For
screening. What purpose it served was not widely understood. As a
rule, banks were capable of evaluating the loan applications. Nobody
came forward with an explanation. But there were sufficient hints
that CAS, as it was known, was a collection point for the powers
that be.
When it comes to the monitoring of banks and their transactions in
government securities it was negligence per se and simple.
Investigations into the Harshad Mehta scam revealed that the single
factor that facilitated the illegal deals in government securities
was the delay in computerising the departments. As one entrusted
with the work, Dr.Rangarajan took it easy and procrastinated. With
the economy ending up paying a heavy price. By the time the golden
principle of accountability was also thrown to the winds. The loss
was not in terms of money but also in morale and momentum of
economic growth. Which was inestimable.
Rangarajan’s regime at the RBI also spawned a good crop of
scandals. Licences issued to private banks were one. It is still not
clear why there was need for new banks while the priority should
have gone to consolidation and restructuring of the public sector
banks which had successfully realised their branch expansion targets
and deposit mobilisation. Looking back it was a conspiracy to favour
a few individuals. For what? God alone knows.
What is to be borne in mind, however, is that the new private banks
did not survive even their teething troubles. They were taken over
by other banks and some of them generated more scandals than profit.
Thank C.R.Bansali: otherwise the licensing (for banks) spree would
have gone on for long years with disastrous consequences to the
banking system. Why of all the people C.R.Bansali, (and how he), got
the banking licence still remain a mystery. Investigations on these
lines stopped on the fringe.
It is at the time of the South East Asian currency crisis,
Dr.Rangarajan lost the proverbial emperor’s gown. No one with a
basic understanding of monetary economics would have done what he
did at that time. Currencies were falling across the board like
nine-pins. In far away Russia and Latin America, currencies caved in
to the squall. The SE Asian governments were ramping up their
interest rates to keep their currencies in shape. China and Hong
Kong escaped because of their huge foreign exchange reserves. Even
then it was feared that the two countries would not be able to hold
out for long.
At the Reserve Bank of India, Rangarajan lost sight of the ground
realities. He took an unpardonably isolated view of Indian economy.
Even if the government wanted in that way, he, as custodian of the
monetary authority, should have resisted. But he played along in the
name of stimulating the sluggish economy. The interest rates were
slashed by two per cent in as many instalments.
The consequences of such high wire act in the sensitive area of
foreign exchange mercifully did not percolate into the lower layers
of the society. The economy did not move taking note of the lower
rates. Its lethargy emanating from other reasons. Only the
speculative elements in the forex market benefited from
Rangarajan’s miscalculation. The country lost over $2 billion
worth of precious foreign exchange reserves in just two weeks. The
amount then lost was not inconsiderable as it accounted for a tenth
of the country’s total forex holdings. Again no attempt was made
to fix the responsibility for the apparently wrong policy decision.
Nobody thought of a CBI enquiry.
It is under these circumstances that Rangarajan was shunted out of
Mint Road. The change of guard was swift, the government leaving
nothing to chances against the background of steady erosion in
exchange reserves. If it went unchecked it would have assumed
massive dimensions of an avalanche. The announcement of his exit and
replacement took everyone by surprise. Chandrababu Naidu had little
difficulty in accepting Rangarajan, as he was politically
non-controversial. His incompetence in handling monetary situations
at a crucial movement was not known to the uninitiated public
including politicians. His high profile also was helpful. While
Rangarajan cooled his heels in Hyderabad Raj Bhavan, Dr.Jalan went
about with his damage control measures. The bank rate cut promptly
reversed, letting sanity back into the market. The run on rupee
abated.
 Prominent
among the pretenders to the North Block throne was also Dr.Jalan. As
advisor to the finance ministry earlier Jalan indeed did good work
lending a helping hand in setting the stage for non-inflationary
growth.
The government had a difficult time in choosing a replacement for
Rangarajan. Apart from Dr.Jalan, figuring in its short list was
Mr.M.R.Sivaraman, the dynamic revenue secretary. Sivaraman was
feared by fellow bureaucrats, wily politicians and erring business
men. As he had their horoscopes at his finger tips. Dr.Jalan was
favoured because of clannish considerations. Sivaraman went to world
bank.
Jalan of course knew his economics. But the RBI administration
needed something more. By the time he took over stock scams became a
standard feature of the capital market. How the scamsters operated
was also known to, at least those who visited the stock market
often. But as in the case of Harshad Mehta no one paid any heed when
the stock prices surged with no apparent reason. If Harshad Mehta
and C.R.Bansali had exposed Venkataramanan and Rangarajan in close
succession, it was the turn of the Jalan to be taken for a ride by
Ketan Parakh & company and the Home trade leviathans. They were
better equipped with refashioned tools. The money siphoned out of
the country returned via tax havens-based investment companies. The
rich urban co-operative banks also could be tapped with
impunity.
The most unpardonable consequence of it all is the destruction of
the co-operative banks in India. Painfully built up over the years,
they were the back-bone of rural development. People had reposed
confidence and faith in co-operative banks which they equated not
with other banks but with the government itself. On the whole they
set records in deposit collections while supporting a host of small
scale industries and businesses which in the normal course would
have found it difficult to come up. True at the moment only a few
banks are in the docks. But that is no consolation. The official
indifference and take-it-easy approach struck a lethal blow to the
cooperative movement itself. The co-operative banks were not in the
pink of health even before Ketan Parekh came along. Now the public
faith in co-operative banks and societies is well enough shaken.
Beyond repair.
At the Reserve Bank, however, the only good work Jalan did was to
rectify his predecessor’s ominous drift. Otherwise he had not
covered himself with glory even in the routine job of handling the
banks. His observations betray a lack of understanding on the way
the bankers, if not the banks, function. He repeatedly was saying
that the banking industry being decentralised and the banks had a
free hands not only to take credit decision but even to fix interest
rates. In practice, bankers are concerned only with their wages,
perks, promotions and a happy retirement. The question of economic
development is not certainly on their agenda. The banks’ laxity in
this respect is reflected in the surging investments in government
securities and the drop-off in credit demand form the industrial
sector.
It is not suggested that low interest rates and plenty of credit on
their own could boost investments. But in India there is endless
scope for deposit mobilisation. And fresh funds are needed in large
quantities for deployment in productive channels. Otherwise the risk
of residual talents among entrepreneurs being deluged by the global
market forces is considerably high. In other words it is the
responsibility of the RBI to reposition the banks to meet the
unfolding challenges. Even the question of lower interest rates has
to be viewed in that context. Again no word, let alone a road map.
The strength of Indian banking system comes from the fact that 80
per cent of it is controlled by the government. As the recent
history of private banks has shown the longevity of many banks would
have been in doubt if they were not nationalised in time. Thank
Indira Gandhi. Once nationalised, the question whether the banks
were weak or strong did not arise. Outside the public sector, no
bank would have attracted this much of deposits. This plain truth
was lost on the supervisory layers. None care for the nitty-gritty
of the so called weak banks.
The panel (Verma Panel) set up by RBI also did not furnish
information on the real state of affairs. Verma Panel made matters
worse by calling another nine banks weak. None realised then that
public declaration by an official panel would sap the momentum of
the industry.
But the fact of the matter is that they all survived with
respectable growth in deposits because of their state ownership.
What Jalan should have done was to undertake the once shelved
restructuring of banks. Eliminating uneconomic branches and swapping
the overlapping ones. It could have made the banking system look
healthier. But everything stopped with VRS. No worthwhile effort is
being made to tone up the efficiency of the system. |
