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Mayhem on Mint Street

On September 1, I bumped into a familiar face walking on one of Mumbai's promenades. I was pleasantly surprised by my discovery. After all, you don't get to see the governor of the Reserve Bank of India in T-shirt and sports shoes every day. He too was startled when I interrupted his brisk stroll with a polite "good evening sir". And I don't blame him. You don't want to be startled by bearded walkers wearing monkey caps on drizzly evenings. It could well have been you-know-who. Actually Dr Bimal Jalan was deep in thought. I did not deem it polite to disturb his reverie. Perhaps he was thinking about the new initiatives to be unveiled by the RBI.

Since the rupee has sort of stabilised --- till the next bunching of oil
payments due by winter --- the folks at RBI perhaps believed they need to focus on other pressing matters pending on the 18th floor of the brown stone building. In any case, you do need a break from munching exchange rates ad REER for breakfast, lunch and dinner. So they decided to take up two pressing issues pending for long on the agenda of the mandarins on Mint Street:
** investments by banks into the capital market.
** recovery of bad loans by banks.

Let us consider the details of the initiatives.
First on the new limit investment in capital market. Till date, the banks were free to invest 5 per cent of their deposits in stocks. Now they are allowed to invest 5 per cent of their outstanding advances in the stock market. The stock market is bullish with the development as it assumes a sum of over Rs 20,000 crore (around $ 4 billion) will flow into the market. The RBI also went further and, according to insiders, "nudged" the banks to invest in the schemes of the Unit Trust of India (yes, the same!). Now I don't think there can be any quarrel per se on the freedom afforded to banks in terms of investment decisions. After all, world over banks do invest in equity and receive great returns.

But the initiative raises two important questions. To start with---and on a fundamental note---why should the RBI in a liberalised era be telling the banks what to do with their money? Secondly, why should it tell the banks or rather nudge the banks as to where the money should be invested? Is the RBI certifying that the UTI is better, safer and more preferable than the others? It couldn't because the UTI has been bailed out by the Government with over a billion dollars just two years back and virtually every scheme of its (barring the balanced fund) is languishing in the lower half of performance charts. Maybe it is trying to tell the banks that UTI is a sarkari fund and thus kosher. Now why would you do that in the new liberalised era? Is this an admission that fund managers of banks are crooks? Or is this an admission that eight years after the scam, the regulatory mechanism is yet vulnerable to being duped?

Now let us consider the second initiative. Banks have been asked to
individually initiate recovery/settlement process of bad loans or NPAs (as of March 1997). The loans have been split into two groups: those under Rs 5 crore ( around $ 1.1 million) at a competent level and those over Rs 5 crore at the level of the chairman/ MD with board approval. The modus is: between September 2000 and March 2001, banks must initiate discussions with defaulters notwithstanding litigation in whichever forum.

So far so good. Now comes the clincher. The banks have been asked to recover 100 per cent of the outstanding balance when they were declared non-performing. Plus interest at current PLR from April 1997. The assumption seems that these defaulters are sitting on the money and not paying. A more practical approach would have been to allow banks to recover whatever possible. But that would have been reformist.

Not just that. The freedom to settle is only for the smaller loans at
competent levels while leaving the bigger fish to the banks' boards and courts. This is neither just nor equitable. Why target only the small fish? A bad loan is a bad loan, small or big. Competency to recover or settle has little to do with the amount in question. What's more interesting is that the RBI (perhaps at the behest of the Ministry of Finance) has been led to believe that publicity would provoke the defaulters from paying up. The assumption is that once names of directors associated with the defaulting company are published, the defaulters will come running. Such naivete!

Interestingly, the RBI has asked banks to exclude "nominee directors of the government, banks and financial institutions" from such lists. I suppose the RBI believes that these sarkari directors are not accountable. If that is so, why do they sit on the boards at all? Of course, these are not issues that can be solved in one evening's walk. The critical issue that the Ministry of Finance needs to resolve is the conflict that the RBI faces in its multi-faceted roles: as the Government's banker, as the monetary authority, as owner and regulator of banks.

Maybe Dr Jalan was thinking about these issues when I startled him. Perhaps he was wondering why it should be RBI's business to tell the banks where to invest their money or how to recover them from defaulters.

(V Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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