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Demonetisation-hit Urjit Patel pushes forward Raghuram Rajan era reforms

Mumbai:When Urjit Patel took over as the 24th Reserve Bank Governor on September 4, 2016, he would have hardly expected to preside over one of the most disruptive and controversial economic moves by a government in several decades — demonetisation.
Patel, who succeeded Raghuram Rajan, had to witness the hardship faced by millions of citizens as they scampered to deposit demonetised notes in various banks’ branches and struggling to withdraw cash. Managing the ban was one of the biggest challenges for Patel, who completes two years of his three-year term in office.
However, Patel, an accomplished macro economist with degrees from the London School of Economics and Oxford and a Phd from Yale University, who has always been known to be reclusive unlike his predecessor the high-profile Raghuram Rajan is seen as having gradually clawed back on by not relenting on the clean up of bank balance sheets and rules on bad loans besides a tougher policing of banks.
However, the economy which suffered heavily, with GDP growth falling to 5.7 per cent in the April-June quarter last year, recovered in April-June 2018 when GDP growth recovered to 8.2 per cent.
Two of the major initiatives which were kicked off during his predecessor’s tenure — formalisation of the Monetary Policy Committee (MPC) and cleaning up of bad loans in the system — have since been carried forward.
“Getting the monetary policy process streamlined with the MPC is another major achievement which ensures that the decision is now based on a committee with a fixed target,” said Madan Sabnavis, chief economist, Care Ratings.
Despite calls from corporate India and others for going easy on the asset quality review kicked off by Rajan on the grounds that growth would be hit, Patel has continued the exercise. RBI has utilised the Insolvency and Bankruptcy Code (IBC) to address the huge debt pile of some of the biggest defaulters; the RBI has already come up with two lists of 40 corporates with debt of around Rs 4 lakh crore. The third list of around 60-70 corporates which owe around Rs 3 lakh crore is underway. He added to the clean-up exercise by issuing a circular scrapping all loan restructuring schemes which were nothing but packages aimed at whitewashing non-performing assets (NPAs). The RBI did not relent even when the government sought relaxation in the famous February 12 circular.
Financial sector sources also point out the governance and regulatory issues, especially in PSBs, as a concern. “There were issues on the regulation front. The Rs 13,000-crore PNB fraud was one issue. The RBI had sought more powers to tackle governance issues but the government has contested it,” said a source.
Sabnavis said, “Unlike his predecessor, Patel had a more challenging first two years of tenure as it involved resolving the contradictions within the system unlike Rajan who had a delicate external account to handle. Starting with demonetisation where the RBI had to carry out the scheme which the government had implemented to addressing the issue of quality of assets that was flagged by Rajan, the present RBI Governor has steered the central bank in an adept manner.”
“The NPA resolution process is probably the biggest achievement of the Governor where we have now in place a firm process for resolving NPAs based on the February 12 circular. This has been challenging given that it means working through the interests of the government which owns the PSBs and companies which have an interest in ensuring that their cases do not go to the IBC framework,” Sabnavis said.
But challenges remain. The first would be to ensure that banks have completed their NPA recognition task. Second is to make the PSBs better capitalised so that the banks in the prompt corrective action (PCA) list come back to the manifold. Third is to improve governance systems in both private and PSBs. Fourth is to create a framework for exchange rate management. Fifth is to make the new banks which include payments and small banks relevant as they have not quite turned out to play the role that was envisaged, Sabnavis said.