Raghuram Rajan: 90-95% of what I wanted to achieve is done

However, on why he chose to leave, Rajan did say that dialogues with the government didn’t reach a place where he could continue.

He has been open to reforms and innovation. And as far as stability goes, he has been conservative. “Let’s make sure we aren’t overly exuberant and whenever we have had to say no, I have never worried about.”

He also spoke about unfinished buisness. Regarding NBFCs, which have been allowed to function with minimal regulatory control, he said the RBI is monitoring them. “We don’t want banks to be exposed because they could incur losses. Somebody has to finance loans and some NBFCs are taking up lending,” he said.

Public sector banks  are under heavy stress. They have been battling loans, and first step according to Rajan would be to stop the leakage and improve due diligence. In this context, the Bank Board Bureau is a welcome development, he said.

We are in a country where there are tremendous number of low-hanging fruits, he said, referring to a number of problems that could be addressed in the system. “I think one of the problems is how do you focus on the necessary number of things.”

He signed off with his views on crony capitalism: he said there was no hidden hand that had led to him to leave RBI. “If they had such power they would have stopped me,”he said. “I have had absolute freedom in what I wanted to do. I have had great relationships with the old government and the people who matter in this government.”Below is the verbatim transcript of Raghuram Rajan’s interview to Latha Venkatesh on CNBC-TV18.Q: Do you think that India's macros have been rewritten? Do you think that six percent to two percent inflation will be a reasonably well respected range for India's inflation?A: It is embedded now both in legislation as well as in government notification for next five years. So, it is something that all agencies, government, Reserve Bank of India (RBI) etc will try and achieve. So, yes, embedded absolutely.Q: When you gave your first speech on September 4, 2013, you started by saying that the RBI's mandate is to preserve the value of the rupee but that speech had a lot of goals. What was the one goal you came with at that time which you wanted achieved in your three years?A: The immediate objective was to stabilise the economy and not so much the economy itself which was reasonably stable but the perception of the economy.We were in the Fragile Five at that time and daily predictions about the rupee were worse and worse. The rupee was a barometer of what people thought about the economy at that point. I remember some very respectable analysts saying it is going to hit 100 -- my son also. The point is that, first stabilise then create the reforms that were needed to move the financial sector.Both were related, which is why my opening remarks were about here is what we are going to do in the short-term but here is the pathway for the longer-term and that struck a chord in people and then the issue was implementation and execution.Now, it came together. Of course, all sort of successes on the policy front depend on a fair amount of luck and a fair amount of events that happen completely outside your control but that contribute. So, we have been in a sweet spot as a country and that has helped. But I also think we have made some changes in the financial sector, institutional changes that will live on.Q: Weren't there other goals? Was it only stability of the economy that you predominantly thought of?A: First was stability, but then the second was reforms that build a more resilient market, a more competitive banking system, more access to financing especially for the small and medium enterprises as well as the poor who have been excluded and on top of all this one of the important factors in stability was a resolution process, a process of recovery of debts and putting projects back on track, which was absolutely needed in the short-term but also in the long-term for us to be taken seriously as a place to invest. If you are going to invest in large mega projects, you have to have some confidence of return on capital (RoC).Q: I very clearly remember and I have your speech with me. You said these are the short-term goals. What did you come with in terms of a term? Did you come prepared for three years because usually governors have five years?A: No, I have said again and again that I am fundamentally an academic. This is my side job. I was three and half years at the International Monetary Fund (IMF). I have spent some time in India, four years now and the idea is not to be a career bureaucrat or a career technocrat, it is more where I can implement ideas, where I can implement reform programme, try and do that and this was absolutely a job I wanted to have, we have worked together as a team in RBI. We have got a fantastic team and we have made a great deal of difference.Q: For the first time you are not answering my questions. It is not like you at all.A: Did I come in with three years. Yes, absolutely. I was intent on doing everything I could.Q: Because in your first speech you said this is the short-term agenda. I even highlighted that line.A: No, that is your surmise. I am not saying I had in mind full stop at the end of it or whatever but everything I wanted to do was structured for a three-year horizon. Now as we start with the bank clean up, I saw there were some things, which would require perhaps at least waiting and watching and being ready to react for a little while longer. Similar, with the Monetary Policy Committee (MPC) maybe a couple of meetings, to see it going on, would have been useful. That is why when people kept asking me are you in for a second-term, I said, well there are things to be finished. But that doesn't mean in any way that I was absolutely hell-bent on having a second term.Q: You just said in your letter to your employees that I would have liked to see these processes complete.A: I was open for staying a little while longer to see them complete but at the same time I was perfectly happy to go.Q: But would you have been open for a two-year term, extension of up to two more years.A: That is a hypothetical question. The main issue is there are some things that remain unfinished but my sense is 90-95 percent of what I wanted to do both in that opening statement and that have emerged after that are done as initiatives where you need to set structures, ideas have to creep in etc. What is left to be done is to see it through and that also requires thinking, that also requires changes. But that is also a much longer-term issue and this job is never done.Q: What could have kept you? I am telling you that there are much larger number of people who would rather you stay, so, what could have kept you?A: There was a process of dialogue with the government and dialogue eventually didn't reach a place where we could agree that I would stay on. That is essentially what happened. So, given that there is no point talking about what could have happened and what would have happened.Q: Is it that all the vituperative attacks, completely unjustified attacks that changed your mind?A: I have said again and again. First, university gives you a pretty thick skin. There are lots of attacks. Not ad hominem, some of the attacks were ad hominem that is imputing sort of motives and alleging things completely without any basis those I just put aside. I don't even pay any attention to it.However, obviously in this job there are legitimate criticisms, are you focussing too much on inflation, and those you can address and those I have tried to address in various speeches because it is important to convince the public in this country about the way you are going and why you are doing it because ultimately only with conviction will there be durability. After all what we are trying to do, what we need to do is institutional reform in this country which builds a platform for strong and sustainable growth. I keep saying, it is a no-brainer to generate growth when the rest of the world is growing strongly. Then you focus on export lead growth and that doesn't require a huge amount of institutional change. But if you are trying to impel domestic demand, you have to be very careful, you don't get into an inflationary spiral, you don't get into a credit spiral which leads to a bust.Q: I have all those question.A: So, I wait for your sequence._PAGEBREAK_Q: I will tell you why. I am still trying to figure out if something went wrong in the sense is it that if you had to play the game again over the last two years, would you have played it differently? It looks like quite a few ministers had angry things to say or probably wanted to grab headlines by saying those things. Is it that you would have been a more team man or did something go wrong?A: You have to remember the RBI is supposed to be an entity that is conservative, that is longer-term in vision and that focuses on stability. I have been very open towards innovation and reform trying to stir up the reform process. But as far as stability goes I have been very conservative. Let us call a spade a spade, let us make sure we are not getting overly exuberant. Let us provision where we need to provision, let us recognise where we need to recognise because both go together.Q: Do you think that hurt some of the ministers?A: I don’t want to speak for the ministers, what I will say is wherever we have had to say no, I never worried about reappointment or about whether I will have a future career in the government or anywhere else, I have said no when I think it is in the best interest of the country.I think that way I am being the best team player I can possibly be. If I go along just for being comfortable, I think we are building risk for the future, which will hurt the country. If you look in hindsight, whenever we have made a mistake its being by being too pliant rather than doing our job and being the regulator we have to be.So for example state governments that have been making promises they cannot hold or have been building up debts that they cannot pay, we have been firm -- we have told them where they have to, where programmes are initiated, which we think are unviable, we have told the relevant ministries.Q: Were those the factors that were speaking against you?A: I am not going to speculate. I think the bottom line is that there was no consensus and that is where it stopped.Q: We were speaking about your unfinished business, I was thinking of a couple of them -- one is the non-banking financial companies (NBFC) area, we always thought or that was perception and maybe even the reality that RBI was a little wary of NBFCs because they are lighter touch in regulation compare to the banks, but lately we have seen a lot of exponential growth in NBFCs and the extent of consumption consumer finance -- we know that investment has not picked up, but consumer finance was galloping at 22 percent year after year for 3 years and you have doubled it. Are you worried that you are behind the curve in regulating?A: As far as the NBFCs go, we have been lighter touched for the very reason that they don’t take deposits and we have sort of been very careful with the deposit-taking NBFCs. Now, what we do want to ensure is the bigger NBFCs are inspected regularly and that their asset portfolios are seen with the same kind of caution we see banks, noting however that because they financed usually with longer-term money, that they have a different capital requirement, that we can be a little more liberal on the risk that they take.Now remember, if we did not allow a little more risk taking, those risks would somehow find their way back to the bank. For example, loans to developers.Q: Loan against property (LAP) a worry even in the regulated sector.A: So what we don’t want is the banks to be heavily exposed because of the possibility that they would perhaps incur large losses. Somebody has to finance those loans and those loans aren’t easily financed through a bond markets. So NBFCs do take up that kind of lending, what we have to make sure is that they have the full incentive to recover on those loans.Q: You are not worried about consumer lending as well?A: Of course, we have to be worried about the overall picture and whether any entity is taking excessive risks. So we are monitoring this process and we do weigh whether these entities have enough capital, whether their exposures are excessive and if you recall we are bringing them under the same regulatory umbrella as the banks in terms of non-performing asset (NPA) and so on, to make sure that even while these guys are taking more risk, the disclosure is also appropriately kept.Q: I was just worried even microfinance institutions (MFIs), some of them have got small bank licences. There is an exponential growth even in their finances so you have the bandwidth, are you sure there are no red flags there?A: I think growth is often a flag, let us say an orange flag rather than a red flag. However, remember that one of the factors in the economy today is the public sector bank loan growth is much weaker and as a result something else is filling the gap. Now, we have to be very careful that while the public sector banks are dealing with their balance sheet problems, we don’t completely shut-off credit growth elsewhere.So you have to tolerate, that is why private sector banks are also growing at 20-25 percent.Q: But their consumption line is growing?A: Even if you look at the small business lending as well as the industrial lending, it is also growing in the high teens or low 20s.Q: A lot of people think that small and medium-sized enterprises (SME) lending is actually lending against the property?A: It could be and one of the things we are focussed on, which now come up regularly is the real estate exposure direct or indirect of the banks.Q: You all are monitoring it directly?A: We are monitoring it. There are some banks that are exposed to a greater degree than others and we have had a conversation with them about the extent of the exposure. Now I think all said and done, land is the biggest source of value in an emerging market, so to completely rule out using that as collateral or that as a basis for lending will basically shut off a lot of lending.Q: It is not that a major unfinished agenda, the public sector banks. I know the government is the owner, but as regulator it is 70 percent of what you regulate, the numbers are sometime scary.A: The first is stop the leakage and that means make better loans, which means the appropriate due diligence, which means the appropriate governance. So I think the Bank Board Bureau (BBB) a very welcome development and remember it was on the basis of Nayak Committee, which suggested this and the government espoused this and has moved forward quite firmly and fast on this.I think that is a welcome development, they are looking partly as in terms of filling those positions, but partly they are thinking through what needs to be done on the governance end and the loan recovery side, which is very important.Q: If you had two years that would be the area you would have concentrated on?A: That is one of the areas. There are so many places where you can constantly make improvements, one of the nice things of being at the RBI is that we are in a country where there are tremendous numbers of low hanging fruit and you feel like a kid in a candy store. You want to grab, grab, grab because there is a so much and one of the problems sometimes is focus. How do you focus on doing the necessary number of things and a lot of areas have been opened for example consumer protection, we have enunciated those five rules of consumer protection. We have told the banks to go out and figure out how they want to do it, but there are areas of continuing worry, let me give you 2, one mis-selling of insurance. A big area of concern and it something where we have had consumer advocates come to us with mystery shopping exercises that suggest and we have sent mystery shoppers into banks and we find that there are issues about full information, so that is an area we are going to take very seriously.Second, just functioning of automated teller machines (ATMs), if 30 percent of ATMs that you have don’t function, what kind of efficient system you are running?Q: We are hoping they are going to leapfrog and make ATMs pointless.A: But till that happens, you can’t go into this thing and find the ATM not working. Similarly, the ATM frauds -- can we find some way to prevent them? So for example if you key in your pin number, somebody has a phone sitting up there taking photos, they can see it.In Indonesia they have a simple cover when you put your, so you have to key it in under a cover so only you can see. Well, that a plastic cover which can be just fixed on. Can we fix it? There are thing like this that we need to constantly keep innovating. The point I am trying to make is one yes, there is a need to do this, but second I remember this famous phrase the cemetery is full of indispensable people, somebody else will come in and do it. This organisation is strong, it has a good second, third line and one of the interesting things is they do all the work and you get the credit, so it is important that they will continue, it has got a fantastic ethos.Q: You have been perhaps one of the best crystal ball gazers of red flags in the global scenario, especially the 2008 crisis. Now we have this unlimited dollar printing and now government joining the bandwagon and exactly at that time both bonds and equities are at their highest historical prices. How do you look at this thing unravelling?A: I worry because I don’t think we understand fully what is going on. On the one hand, the notion that these very low real interest rates are here because of low growth, low productivity etc, but why do we have such low productivity, what is going on, are we mis-measuring it or is it truly real low? Where is all this technology, innovation, this healthcare innovation, where is it getting counted, where is it getting absorbed? So on the one hand we are very scared we will all be replaced by robots, but that means a huge increase in productivity based on technology. On the other hand, we are saying there is no growth.Q: Are we worrying about this huge unravelling, because we have come out of Lehman and there is no such big apocalypse waiting to happen?A: I do think that exit from the current policy is going to be difficult. You have asset prices that are priced for a combination of -- on the one hand -- great depression levels of interest rates and -- on the other hand -- equities are priced as if earnings are going to be strong. Of course, the discount rate is also low, but earnings are also expected to be quite strong.The two again don’t fit together, so there is a disconnect in the way the things are priced and the only way you can explain it is with we have distortions and distortions perhaps created buy policy and that is why I do worry.Q: You worry where might things go wrong?A: At some point there will be an adjustment, what the trigger will be it is hard to say. The world's best scenario is these winds down, gradually we come out, or growth picks up etc, etc, that is the benign scenario. The not so benign scenario is the trigger, either a trigger to earnings because of some adverse geopolitical development or a trigger to discount rates because of some adverse inflationary developments.Q: Sometime back you worried it would be China?A: That could be a growth development, but China my sense is that there is not going to be one because of there is a filtering of the news from there and so on. It is not going to be one report which suddenly makes you worried. It could be a policy move as in January this year or in August last year, but it could also be that in the areas where news is more unmanaged for example the US strong inflation report could be very problematic.Q: How do you think India should prepare for this?A: We have been doing that for quite some time. I think this is why my sort of emphasis on macro stability, the government certainly with the fiscal -- in the Budget adhering to fiscal norms, the movement on the goods and services tax (GST) more than just the enactment of the GST was the signal it sent that the central parties could come together for important reforms and that ode -- I will support the government and oppose outside that seems to have broken. This is great news for the country and if this can extend to other important pieces of legislation it bodes very well for our future.Q: Was it crony capitalists who got you because you went after them like no governor has gone or no governor maybe needed to go? If that is the case then we have something to worry?A: No, I don't think you should attribute this to some hidden hand or something. I feel I have done what was needed to be done. If they had such power, they would have stopped me in what was needed. I have absolutely no hesitation in saying that what I wanted to do I have had absolute freedom in doing. Obviously, this requires a lot of work behind the scenes, with government, persuading government. So, when people say you have been fighting all the time, absolutely not -- great relationships both with the previous government as well as people who matter in this government.Q: So, you part as friends?A: Absolutely. So, I don't think that is the issue. I think the issue was these things needed to be done and obviously there are constituencies that get riled and if there are enough constituencies that get riled maybe they form a broader coalition. But I don't think there is any point to finger at X and say X is the hidden hand.