Why every country wants the Head Banker to be a scarecrow?

Would Rajan get to use the powers that he wields ?

“There have been three great inventions since the beginning of time: fire, the wheel and central banking”-- Will Rogers

By Neeraj Mahajan

No offense meant to Raghuram Rajan the distinguished economist and Chief Economic Advisor in the finance ministry who made a name for himself by predicting the global financial crisis in 2008. His competence and abilities are above board but the foremost question in everyone’s mind as he prepares to step into the Corner office on 18th floor of the Reserve Bank of India (RBI) building in Mumbai is –whether he would get to apply the sound economic concepts and theories in his brain or end up proving to be yet another scarecrow.

Bank of Israel’s Governor Stanley Fischer took premature retirement, amidst rumors of strained relations with Prime Minister Benjamin Netanyahu. Prime Minister Viktor Orban pushed a legislation Hungarian parliament curtailing the Central bank powers. Likewise Prime Minister Shinzo Abe ordered Bank of Japan to print more money and got his own people to run the bank.

It is the same story all over the world. In India too though the economy has liberalized, the RBI governor remains a person who should only speak when told and what the government wants. Since bank nationalization in 60s -- successive governments have wanted the most important portfolio in the financial sector to behave like a rubber stamp.

The crux of problem is that the RBI Act, 1934—an outdated and decaying Act which concedes the powers to the government to appoint the governor and “not more than” four deputy governors. This means that the Governor-- can’t select even one member of the team he is going to work with. It’s really unfortunate that India does not have a practice of advertising for the RBI Governors post to invite the best people from academics, public policy, finance, IAS, bankers or anyone from the corporate world to compete openly – in the true spirit of may the best man win. 

Even in the past some of the best economic brains have adorned the RBI governor’s chair, but not many of them enjoyed the powers to do things that were needed. Precisely for this reason people want to know how effective Raghuram Rajan proves to be. What is he going to do or change, if at all? Till he arrived, lobbyists could be heard suggesting that an IAS officer should be selected to consolidate the RBI’s Administration – where all the second in commands – the four deputy governors -- two from RBI promotees, an economist and a banker the lack administrative skills. At this rate personality is going to matter more than his competence and knowledge of economics.

Technically Subbarao 63, who was appointed RBI Governor for three years on Sept 5, 2008 and granted a two-year extension in Aug 2011 could have been give another extension but wasn’t. It is the government’s right to select a RBI governor. Only someone who enjoys the government’s confidence can remain RBI governor.  Another argument in his favor was that with elections round the corner in five states and federal elections likely around May 2014, his continuation might have provided continuity in RBI Governance till the next government chose a successor.

But probably these democratic considerations have no meaning, particularly at a time when the RBI is to take a final call on bank licenses to a number of eligible corporate applicants. Billionaires Anil Ambani, Kumar Mangalam Birla, Tatas, Bajaj Finserv, L&T Financial Holdings and state-owned India Post and Life Insurance Corp of India are among the 26 companies that have applied licenses to open banks.

As a matter of policy regulators in the United States, South Korea and some other countries do not allow industrial houses to set up banks. One of the apprehensions is that corporates can misuse public deposits and advance loans to their own units, customers and suppliers.

Recently Kumar Mangalam Birla, the chairman of Aditya Birla Group, who was appointed to RBI Central bank’s board in June 2006 resigned from the post amidst allegations of conflict of interest after his group firm, Aditya Birla Nuvo- a non-banking financial company (NBFC) promoted by the Group applied for  banking license.

Earlier M&M Financial Services — a NBFC promoted by Mahindra & Mahindra Group, withdrew from the race to seek bank licenses because of stiff guidelines and undue penalty on large, asset financing NBFCs.

It may be recalled that Private-sector banks have been part of the Indian formal banking sector since very beginning. In early 20s private banks like Bank of Bengal, Bank of Bombay and Bank of Madras were merged to form Imperial Bank of India. 14 of such banks were nationalized in 1969 and another six in 1980. However after the wave of economic liberalization under the P.V. Narasimha Rao government licenses were given to 10 private sector banks including Global Trust Bank, ICICI Bank , HDFC Bank, UTI Bank (Axis Bank ), Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank and Development Credit Bank in 1993-94. A few years later Kotak Mahindra Bank and Yes Bank managed to get the licenses in 2003-04.

RBI’s primary motive in awarding new bank licenses is the fact that around 40% of India’s adult population doesn’t have access to banks. According to a 2011 World Bank survey, a majority of India’s 6,50,000 villages do not have even one bank branch, and just 3.5 of every 10 Indians have access to formal banking services.

The million-dollar question is what magic can the new banks perform when the all the existing nationalized and private sector banks have failed to provide inclusive growth.

Even the IMF too reportedly believes that the risks from private banks outweigh the benefits.

(To be continued)