The adjective most often used for Urjit R Patel, the former governor of the Reserve Bank of India (RBI), was reticent. His book Overdraft: Saving the Indian saver exhibits that trademark reserve in abundance. Thus, if you are looking for juicy anecdotes about his tenure at the central bank, also one of the most tumultuous in recent times that ended with a rare resignation by the governor, then this book is not for you. There are no verbatim transcripts of conversations with the finance minister or minute-by-minute accounts of regulators working hard to save India's financial system.
At the most, there are a couple of throwaway sentences such as “until then, (mid-2018) for the most part, the finance minister and I were on the same page” while referring to the insolvency and bankruptcy code. Or “lawyers who had agreed to represent the RBI in the Supreme Court (SC) dropped out at the eleventh hour, literally the night before the hearing,” when talking about central bank’s new resolution framework which was challenged at the apex court. Patel also does not break the omerta on demonetisation.
His book is focused on the banking system’s massive non-performing assets problem, its effect on the economy and financial stability and the way forward. If all these sound familiar, that's because they are. This book is in the fashion of previous governors such as Raghuram Rajan and Y V Reddy compiling a book of their speeches with introductions and epilogues.
Patel’s book draws heavily on the speeches he gave as the RBI governor, his previous academic work, and lectures at various universities in the US and India after his tenure as the governor ended. It is most useful where it draws up a framework for analysing the bad loan situation in banks and examining the options for the way forward. It also offers a dire warning which the government would do well to heed.
Patel minces no words and does not spare any stakeholder, and rightly so. He points out that everyone has been responsible for the mess including the government which didn’t question excessive lending by the banks it owns, and regulators who woke up late to problems and then told themselves, “this time it is different” to the financial media which routinely gave away banking awards to lenders pulled up by the RBI. He holds a mirror to RBI supervision by saying that supervision teams felt the “Stockholm Syndrome” and came “up with mitigating explanations for not recommending apposite strictures and penalties commensurate with transgressions that have been brought to light”. He says bankers’ fears of the 3Cs (the Central Bureau of Investigation, the Central Vigilance Commission and the Comptroller and Auditor General) are an exaggeration.
His central thesis is the Urjit Patel trilemma which he had unveiled in a lecture a year ago: it is impossible for a) public sector lenders to dominate the banking system while having b) independent regulation and c) the government adhering to fiscal prudence. Thus, if the government wants to direct credit flow in the economy and stick to fiscal deficit targets (and not recapitalise banks), then the regulator will have to relax its norms. On the other hand, if the regulator sticks to its guns, and the government continues to do policy interventions through credit, then it has to necessarily recapitalise banks and say goodbye to fiscal prudence.
Unsurprisingly perhaps, Patel seems to feel that independent regulation has taken the hit. Because the government’s objectives are often different, there has been a relaxation of norms over time, and the pressure abates on crony capitalists. For example, he writes that an asset quality review on NBFCs and MSME borrowers started in a quiet way in 2018 but that “seems to have been postponed”.
Even in the case of the Insolvency and Bankruptcy Code, Patel feels that the government could have done more by way of follow-up. He has expressed his displeasure with the current RBI dispensation diluting the central bank’s framework for bad loan resolution outside the bankruptcy code.
He writes that: “Decisions in 2019 and early 2020 by the government and other stakeholders have increased the likelihood that long-drawn cases are here to stay. Periodic bailout by the government and official entities will likely continue, at least for some banks.”
Patel’s book is quite timely. As COVID-19 continues to lay waste to the economy, the government continues to lean heavily on the banking system to boost demand. At the same time, bad loans are estimated to shoot up by as much as 50 percent this financial year while regulatory forbearance has made a comeback.
”We have to be vigilant that U-turns don’t usher a serial bout of ever-greening and zombie borrowers; otherwise, victory over crony capitalism will, at best, be short-lived, and that the limited progress so far could turn out to be a false dawn," he writes.
Will the government listen? Perhaps, it will, given his comeback as the chairman of the National Institute of Public Finance and Policy (NIPFP).