Economy

KEY POINTS

·         In India, Public and Private Banks have major difficulties with non-performing assets (NPAs), which suggests that the common factor of banking regulation is the root cause.

·         For example, in the Punjab National Bank (PNB) crisis, SWIFT messages were sent out, giving guarantees to private persons, which were not reckoned in the main accounting system of the bank.

·         But, it could be avoided, if supervisory functions were took in an efficient manner.

·         There are numerous other elements the PNB story which would have been caught by elementary capabilities in banking supervision.

a)     Utilising the weekly reports that the RBI gets from banks on forex activities

b)     Rules that mandate regular transfers of people in sensitive positions, etc.

·         In a similar fashion, the NPA crisis would have been precluded if regulators had done elementary things.

·         Banking supervision for commercial loans is not hard. It requires a rule whereby faltering assets are detected and rapidly marked down to zero.

·         This would ensure that a false portrayal of bank soundness would not happen.

·         None of this is rocket science. But we have very poor state capacity at the RBI, and so these elementary things don’t get done.

·         There is a wave of criticism of public sector banks. But the problem is one of supervision and not ownership.

·         If the RBI had done the right things in supervision, these mistakes would not have happened in banks, public or private.

Road map to enhance RBI capacity

·         Clarity of purpose – The RBI must be about the pursuit of sound money and sound banking.

·         RBI had begun on the former with inflation targeting, and not begun on the latter.

·         Role of the board – The board must control the organisation design, resource allocation, and process manuals, and hold heads of departments accountable.

·         Detailed procedures – Detailed procedures to be followed for the legislative, executive, and judicial functions.

·         At present, the RBI staffs have full discretion in how these things are done. This has given a bias in favour of arbitrary power and low competence.

·         Detailed procedural law that gives rule of law, fair play, and competence is the need of the hour.

·         Reporting and accountability – At present, the RBI is a remarkably opaque organisation.

·         It is the largest and most complex financial wing of the Indian state, but there are only four pages of financial disclosure, and it is not audited by the Comptroller and Auditor General.

·         Copious high-quality reporting will generate accountability.