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Why RBI Is In Choppy Waters?

It is funny to note that while RBI kept itself busy counting notes, another big man of dubious means kept himself busy with counting money as well. Only difference is that RBI was counting demonetized notes while this other big jewelry guy was counting all valid notes. The end was ironical; RBI realized that more notes came into the system than what they estimated was under circulation which put a huge credibility question on demonetization drive while Nirav Modi realized its high time to fly out of the country after having ensured a 12000 Cr INR windfall! Adding salt on the wound, RBI found itself at crossroads with the honorable Finance Minister, Mr. Arun Jaitely, implicitly raising a finger at it for not doing enough!

“Supervisory agencies need to assess as to what new system has to be put in place to detect irregularities…should ensure the stray cases are nipped in the bud and they are never repeated.”- Arun Jaitely as quoted in livemint on 21st Feb.

To make matter worse, yesterday (5th April 2018) a few senior RBI officials (of the rank of CGM & GM) were grilled by CBI sleuths on the lapses in the statutory audit of RBI which failed to detect / flag off this massive scam much earlier. The news report also claimed, interestingly, that they were also grilled on the details of the 20:80 gold scheme that was introduced by the earlier government. We call it very interesting as the current dispensation at the center believes that it is the 20:80 scheme that favored jewelers like Mehul Choksi and Nirav Modi.

Why we call it interesting? First, there may only be an indirect connect between the PNB fraud and the bullion benefits that Nirav Modi would have got from 20:80 scheme. The later was introduced only in 2014 while the 13,500 Cr ($ 2 Billion) fraud started in 2011 taking advantage of a process/ system gap/ compromise in the banking LOU process/ SWIFT processing. Second, the economy and the banking sector is still very shaky. There have been multiple frauds with even CEO’s of a couple of large private banks getting dragged, the problem of stressed assets and NPA refuses to go away. Under such circumstances, main parties will need issues to influence the masses. Corruption will surely be at the very top! By connecting the PNB fraud and the 20:80 scheme may be useful for the current government because then the blame can be pushed to the last regime. Among all these noises which is only going to get bigger as we approach elections, our biggest apprehension is that a few casualties will be inevitable and that reputation of RBI as an institution may be one of them!

Unfortunately, the current leadership at RBI seems to be out of its wits partially because of governmental interference (read unwilling partner to demonetization) but also because of some of its own undoing’s!

Post the PNB fraud, in a massive knee jerk reaction, RBI banned all LOUs in a circular dated 14th March 2018. Banning an important instrument of trade finance just because someone misused it, is simply not done. This is comparable to school principal rusticating an entire class for nuisance created by couple of students. The ban completely ignores the financial flexibility LOU gave to many small and medium sized corporates, thus putting them under liquidity/ working capital funding pressures and can increase cost of production as alternate trade finance funding (e.g. LC) have additional costs. Now the same Finance Ministry wants RBI to rethink on the ban, which may put RBI in a quandary. It will look foolish to revoke something introduced not even a month back while it may see more pressures coming in from the government as the later may not like to displease the trading lobby/ corporates when elections are just a few months away.

The most intriguing part we find is the RBI governor statement (sounded more like a man resigned to fate) around being the neelkantha etc! The below is per RBI press note.

[ “If we need to face the brickbats and be the Neelakantha consuming this poison, we will do so as our duty; we will persist with our endeavours and get better with each trial and tribulation along the way,” the Governor said]

Now here, we want to remind the Governor on why the analogy may not be the best. Going back to our Puranas, Lord Shiva drank the extreme poison named ‘halahal’ which got churned out of the sea (samdura manthan). Lord Shiva had to intervene as the poison was having its toll on both the Deva’s and the Asura’s. The blue neck or Neelkanth was the effect of the poison on Shiva. Long story short, Shiva, the savior had to save the world because the poison could have destroyed both Deva’s & Asura’s. The situation is slightly different here in our current banking ecosystem. RBI may well like to consume the poison to save the banking ecosystem but it should note that here the poison (fraud/ corruption) is only poison to the good guys (Devas) and not to the bad ones (Asuras). Here the so called Asura’s are the perpetrators of creating the poison to subvert the system and make windfall gains for themselves. In Purana, Asuras were neither the creator of the poison nor the beneficiary of it!

Now this brings us to the 2nd comment the Governor made.

[“I do wish more promoters and banks, individually – or collectively through their industry bodies, would reconsider being on the side of Devas rather than Asuras in this Amrit Manthan.“]

Now that’s a utopian expectation! We are living in the “Kali Yug” which by definition means that it is the age of “one quarter virtue and three-quarter sin”. In Bhagvaid Gita, Sri Krishna says “Vittam eva kalau nṝṇāḿ janmācāra-guṇodayaḥ dharma-nyāya-vyavasthāyāḿ kāraṇaḿ balam eva hi,”- In Kali Yuga, wealth alone will be considered the sign of a man’s good birth, proper behaviour, and fine qualities. And law and justice will be applied only on the basis of one’s power. (refer here)

That the expectation was ill-founded has become quite apparent in the last few days development where names of senior executives of Axis bank, ICICI bank have come to fore on multiple cases of serious governance issues. With many skeletons tumbling out of the closet, even for the holier than the cow private bank sector, it is quite apparent that expecting more people on the side of Devas is just a wishful thinking. RBI also seems to have accepted that fact if we consider the latest news which states that RBI is yet to approve the bonus payouts to CEO’s of top private sector banks which is otherwise unheard off!

The Governor also spoke of limitations of RBI power on corporate governance in PSBs. A few of that as quoted from the text:

[

  1. RBI cannot remove directors and management at PSBs as Section 36AA(1) of the BR Act is not applicable to the PSBs.
  2. Section 10B(6) of the BR Act that provides for removal of the Chairman and Managing Director (MD) of a banking company is also not applicable in the case of PSBs
  3. Furthermore, in a remarkable exception of sorts, in some cases there is duality of Managing Director and the Chairman – they are the same – implying the MD is primarily answerable only to himself or herself.]

Now the governor is logically correct but there is an age-old proverb “getting wise after the event”. These rules have not changed overnight, then why, question now after the fraud has happened and not having flagged off this much earlier in a way that is commensurate with an institution like RBI. This statement at this juncture sounds more defensive rather than being constructive.

Even if we consider this argument as true realization, then all of us would like to see what RBI does if the alleged frauds/ governance issues at the large private sector banks are proven.

Today, very unfortunately, there seems to be a feeling that RBI is finding itself choppy waters! Compromising on its independence may put itself in bigger trouble as it should know by now that so-called friends are all only fair-weather ones.

Will like to end with the famous line by Robert Frost:

“Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.”

RBI will do best to assert itself strongly and keep the long term in mind while deciding the next course of action. It has always been appreciated for ensuring that the Indian banking ecosystem is managed well and kept a distance away from the vagaries of the global financial ecosystem! That sheen is slowly falling off for a reason that’s more local than global!!!

 

 

Source: Multiple media reports, RBI release. All sources are “in-line” mentioned as hyperlink

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