China Should be Seen as Inspiration, Not Competition: Rajan

Swamy, who led a public campaign to oust Reserve Bank of India Governor Raghuram Rajan, said on Twitter that Arvind Subramanian should be fired for acting against India’s interests during his time as a U.S.-based academic.

In a speech, the Reserve Bank of India Governor defended the actions taken by the central bank, including ordering state-run banks to conduct comprehensive asset quality reviews of their balance sheets.

The Government’s effort in speeding up the debt recovery process and creating a new Bankruptcy system are two important steps towards improving the resolution process; whereas improving governance of public sector banks and infusing bank capital will pay large dividends in the short run.

Refuting the mistaken belief about high interest rates deterring credit growth, Dr Rajan said: “Interest rates set by private banks are usually equal or higher than rates set by public sector banks”.

Replying to a question about Rajan’s decision not to seek a second term, the CPI leader said, “It is his prerogative because as an individual he has the right. whether he wants to continue or whether the government is offering second term to him or not”.

He pointed out that the slowdown in lending is by public sector banks vis-a- vis private sector banks.

Also on the list of possible successors is Economic Affairs Secretary Shaktikanta Das and a trio of former or serving deputy central bank governors: Rakesh Mohan, Subir Gokarn and Urjit Patel.

Credit growth has hit a near six-decade low in 2015-16 at around 8.6 per cent, while bad loans in the system have crossed 13 per cent at over INR 8 trillion in last fiscal year.

Apart from differing with Rajan over the need to cut interest rates to boost growth, Subramanian has also argued against the central bank’s singular focus on consumer prices while setting monetary policy. Malfeasance also contributed in some cases. “The downside is that when growth does not pick up, the bad loan problem is bigger, and dealing with it is more hard”, the governor noted. “This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, with attendant conflicts of interest”, he said. “Moreover as a project went into distress, private banks were somewhat more agile, sometimes, in securing their positions with additional collateral from the promoter”, said Rajan.

Referring to the proposal for easier monetary policy to reduce the bad debt problem, the regulator said such a policy would bring no relief to a heavily indebted promoter.

The logical conclusion therefore must be that it is not the level of interest rates that is the problem, he said.

“Alternatively, a less effective form of capital, if the government can not buy bank equity directly with cash, is for it to issue the banks “Government Capitalisation Bonds” in exchange for equity”. The RBI governor was addressing a meeting with industry and trade representatives on ‘Resolving Stress in the Banking System’.