'I would let one small public sector bank be privatised and see what happens'

  • Tamal Bandyopadhyay, Mumbai
  • Updated: Sep 01, 2014 03:09 IST

The Reserve Bank of India wants to reach its target of limiting retail inflation to 6% by 2016, but that doesn't necessarily mean monetary policy has to be tight all the way, governor Raghuram Rajan says in an exclusive interview, in which he also speaks on corporate governance issues in state-owned banks, rising bad assets and the central bank's relationship with the government. Edited excerpts:

Is targeting inflation, as an objective of RBI, acceptable to the government?
We will certainly discuss the central bank's objectives with the government over the year, as announced in the budget speech. For example, we at RBI can't decide what level of inflation the public is going to be happy with... The elected representative of the people speaking through the government has to tell us that. But once it is decided, we should be left to achieve that objective.

Sometimes committees tend to be better at making decisions. (But) we have to make sure members of that committee don't have conflicts of interests.

How worried are you about the state of affairs in public sector banks, particularly after the arrest of a bank chairman involved in taking bribe?
It's hard to tell how much corruption there is, but whatever there is, I think it is too much. We should try and ferret out corruption ourselves, but we are not equipped for it. I am focusing on forensic accounting training. We can punish bad stuff when we see it, as swiftly and as hard as we can. We cannot be seen as a paper tiger.

Punishment is welcome, but how does the regulator purge the state-run banking system?
You are demanding a huge amount of honesty in the system when you put people in charge of Rs 5-10 trillion of assets, give them absolute command, and tell them they are here for one or two years. If you give them that kind of structure, you are creating a perverse incentive. The system has to be such that you recognise the temptation and you don't require somebody to be above average in terms of honesty in order to stay honest in the system.

So governance in public sector banks is an issue?
Yes, we really have to look at governance as well as compensation in a very careful manner. We need a bank board which is more proactive. We need to strengthen the presence of both the informed as well as people who are willing to speak up, people of integrity. Give the MD (managing director) a longer tenure, separate the MD from the chairman, keep the non-executive chairman as a second layer of oversight.

Could privatisation of public sector banks be the solution?
I think right now PSU (public sector) banks are functioning with one hand tied behind their back. Let's loosen that hand and let them compete. If I had absolute power, I would perhaps let one small public sector bank be privatised and see what happens. Learn from that. Privatisation doesn't necessarily mean selling the government stake to a promoter. It can also be a publicly held company as opposed to a promoter-driven company. Don't pick your worst performing public sector bank. Pick a good one where management, governance and culture are good. Ownership is a small aspect if you have the right governance.

Is the worst over for bad loans?
I want to see more growth before I can be confident about the bad loan problem. I think it will eventually diminish just because the projects that were lent to will come on stream; some of them will be unviable, but will be taken over, the debt recovered.

Where I do worry is, what will be the impact on the taxpayer—we shouldn't hand the taxpayer a big bill. That's why we should push towards resolving these bad assets very quickly.

Now that you have spent some time with two consecutive governments, what is your take on RBI's relationship with the government?

RBI has had cordial relationships with both the governments and sometimes there's a view in the press that there should be differences. Indeed, there are issues where we are not on the same page... Eventually, because decisions have to be made, one side goes along with the other.

There are, of course, occasional differences. The classic example is the central bank's views on growth, inflation and interest rates. At such times, the central banker's job is that of persuasion. You have to persuade against a whole bunch of other people who are trying to persuade the government of the opposite. Every industrialist who wants interest rates to go down... This is where credibility matters; you have to show that you understand the markets and having a track record helps.

So you won't touch the policy rate till retail inflation drops to 6% by January 2016?
Let me be careful about what you just said. The objective is to reach 6% by 2016, but that doesn't necessarily mean monetary policy has to be tight all the way. We are trying to forecast hitting by 2016 January. If we think that we will reach either earlier and it will stay that way, or we will go below it, then there's always a scope (of a rate cut). But remember, it could also go the other way.

(Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Financial Services Pvt. Ltd, India's newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck)

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