RBI’s James Bond on Demonetization, Bankruptcy Code & more…

[The book “I do What I do” has been one of the most awaited books for 2017. CS Gaurav Pingle read and reviewed this book on his blog – Thought process! We have a copy of his review here from the original post published here.]

The book “I do What I do” has been one of the most awaited books (for me, at least) for 2017. The book is not just a compilation of the prominent speeches and research papers of Dr Raghuram G Rajan but it gives an adequate background of the same. In the commentary part of the book (i.e. background), Dr Rajan explains the economic scenario, challenges faced by the Govt. / RBI at that point of time. For some of the speeches, he has given a reference to the media / social media hype that was created. In spite of the fact that the book is a compilation of Dr Rajan’s speeches, I feel that this book is a must-read for all law, commerce and finance students and professionals. He gives a rationale of the decisions taken by RBI w.r.t. Foreign Exchange inflows and outflows, fight against inflation, economic growth, currency risks, Non Performing Assets, Monetary Policies, Jan DhanYogana, competition in the banking sector, debt markets, resolving stress in the banking system, independence of Central Bank, Financial Sector Legislative Reforms Committee Report (FSLRC) & much more…

Primarily, the book is divided into 3 parts viz. (i) RBI days, (ii) Global Financial Crises, (iii) Occasional Pieces. The first part, i.e. the RBI Days, covers almost 2/3rd of the book. It covers the first speech of Dr Rajan as the RBI Governor and ends with his last official e-mail addressed to the RBI staff. For law and commerce students and professionals, this part of the book will be very interesting and relevant. The other parts of the book (‘Global Financial Crises’ and ‘Occasional Pieces’) will be relevant (and interesting) for finance students and professionals, as the information is quite ‘technical’.

Being a corporate law consultant, author and trainer, I have ensured the write-up focuses on Dr Rajan’s viewpoint on Insolvency and Bankruptcy Code (‘IBC’), large loan defaulters and demonetization. In fact, the purpose of purchasing the book was to understand the rationale of Dr Rajan on the same.

Why the title “I do What I do”: The title of the book is quite attractive. Like other people, I was also very curious to know the purpose of having such title. Dr Rajan explains the reason in the “Introduction” of the Book.In one of the press conference, Dr. Rajan was asked whether he was dovish like Yellen or hawkish like Volcker. He replied as “I understood what the reporter was asking, but I wanted to push back on the attempt to pigeonhole me into existing stereotypes. Somewhat jokingly, I started in a James Bond-ish vein, ‘My name is Raghuram Rajan…’ To my horror, mid-sentence I realized I did not know how to end in a way that did not reveal more on monetary policy than I intended. So with TV cameras trained on me, I ended lamely ‘…and I do what I do’”.

The sentence became the financial press headline the next day, with the details of monetary policy relegated to the inside columns. On his daughter’s comments on the statement, he said: “The commentary on social media even reached my usually supportive daughter, who emphasized her negative reaction to my unwitting sentence with repeated thumbs-down emojis!

Dosanomics: In late 2015 and early 2016, the inflation rate had come down and the banks had lowered deposit rates. However, few savers were unhappy, in spite of the fact that inflation had fallen much more than the rates on deposits. Earlier, the savers argued that they got paid 10% on their fixed deposits at banks, now they get 8%. Was that fair? Dr. Rajan explained that it was indeed fair, as the inflation had come down faster, so the real returns (in terms of goods and services they could purchase) on their savings were now higher. In his lecture at NCAER in Jan. 2016, Dr. Rajan gave an example of Dosa in relation to inflation. The media termed it as Dr. Rajan’s ‘Dosanomics’.

The job of the Governor: Dr. Rajan was the 23rd Governor of the Central Bank of India. His term was from Sep. 4, 2013, to Sep. 4, 2016. During his tenure as RBI Governor, he had regular meetings with Prime Minister Dr. Manmohan Singh and Finance Minister Chidambaram, and then when the Govt. changed, with Prime Minister Narendra Modi and Finance Minister Jaitley. On the least pleasant aspect of his job as RBI Governor, he stated that it was dealing with bureaucrats who were trying to undercut the RBI so as to expand their turf. In his last speech as the RBI Governor, he offered suggestions to the Govt. on how to reduce these unproductive frictions.

On RBI Governor’s work profile in relation to other public administration jobs, he states that “The job of Governor is probably the most fulfilling job any Indian economist could aspire for. There were many days when I went home tired but happy that we had really made a difference. There are very few jobs in public administration where one can say this because one is always hemmed in by the need to get the concurrence of other organizations, and turf battles make it hard to move forward. At the RBI, on many issues the decision was ours, and ours alone, so progress was feasible and continuous. This also meant that the job weighed constantly on my mind, for I had to keep asking what more we could do, given the possibilities were endless. Putting a policy economist in the Governor’s job is like letting a kid loose in a candy shop!

Demonetization: Dr. Rajan was asked many questions by Reporters on Modi Govt.’s bold move of demonetization, but he refused to answer for some time. In the book, Dr. Rajan has given a summarized opinion and background to such ‘bold’ move. He has stated that:

“I was asked by the government in February 2016 for my views on demonetization, which I gave orally. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals. I made these views known in no uncertain terms. I was then asked to prepare a note, which the RBI put together and handed to the government. It outlined the potential costs and benefits of demonetization, as well as alternatives that could achieve similar aims. If the government, on weighing the pros and cons, still decided to go ahead with demonetization, the note outlined the preparation that would be needed, and the time that preparation would take. The RBI flagged what would happen if preparation was inadequate.

The government then set up a committee to consider the issues. The deputy governor in charge of currency attended these meetings. At no point during my term was the RBI asked to make a decision on demonetization.”

Incidentally, such a revelation comes at a time when the RBI report’s claim that 99% of the demonetized notes were returned to the banks. This may have an impact on the NDA Govt.’s performance in the upcoming general elections.

Resolving Stress in Banking System: The Insolvency and Bankruptcy Code, 2016 was not effective during Dr. Rajan’s tenure as RBI Governor. Therefore, with an objective to resolve the stress in the banking system, RBI had introduced a number of Schemes for facilitating bank resolution of distress. The Schemes were repeatedly re-examined to see how they could be tweaked to facilitate resolution. Dr. Rajan, in his commentary, said that “Unfortunately, with the exception of a few hard-charging and conscientious bankers, the general mood among the bankers was to continue to extend and pretend. They feared they would be held accountable for any concession they made, and constantly (and perhaps understandably) avoided taking decisions

In the postscript to one of his speech, Dr. Rajan has appreciated the efforts taken by the NDA Govt. in enacting Bankruptcy Code and amending various acts governing debt recovery by making them less easy to game. He concludes by stating that “These are important steps forward in rectifying the balance between borrower and lender in India. However, the operational effectiveness of these changes need to be tracked, and further amendments enacted if necessary until we have a resolution system that works in a rapid, fair and transparent way.

Large Promoter Defaults: In one of his lectures, Dr. Rajan deliberated on the large borrowers, their defaults, a role played by the public sectors banks and taxpayer’s money. He said that the reason we are willing to protect the borrower against the creditor is that the hated moneylender looms large in our collective psyche. He stated that the large borrower today is not a helpless illiterate peasant and the lender today is typically not the “sahukar” but a Public Sector Bank. He opined that “When the large promoter defaults wilfully or does not co-operate in repayment to the Public Sector Bank, he robs each one of us taxpayers, even while making it costlier to fund the new investment our economy needs”.

In a very interesting conclusion, which has an importance in the present economic scenario, he said that the solution is not more ‘draconian laws’ (which the large borrower may well circumvent and which may entrap the small borrower), but a more timely and fair application of current laws. He said that India needs new institutions such as Bankruptcy Courts and turn around agents. He concluded that “We need a change in mindset, where the willful or non-co-operative defaulter is not lionized as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country”.

Indeed, Dr. Rajan rightly points out that it is quintessential, we need a change in the mindset to resolve the ever-increasing problems of NPA’s or else it will also be rendered like any other law with laudatory intent. It remains to be seen how far does the Bankruptcy Code remains true to its intent and objective.

Good Bye RBI: The book contains the letter addressed by Dr. Rajan to the RBI staff. He stated that RBI has done far more than what was laid out in the initial statement, including helping the Govt. reform the process of appointing public sector bank management through the creation of the Bank Board Bureau, creating a whole set of new structures to allow banks to recover payments from failing projects, and forcing timely bank recognition of their unacknowledged bad debts and provisioning under the Asset Quality Review (‘AQR’).

He stated that, internally, RBI has gone through a restructuring and streamlining, designed and driven by our own senior staff. He said that “We are strengthening the specialization and skills of our employees so that they are second to none in the world” In the letter addressed to the RBI staff, he states that “I am an academic and I have always made it clear that my ultimate home is in the realm of ideas. The approaching end of my three-year term, and of my leave at the University of Chicago, was, therefore, a good time to reflect on how much we had accomplished.

As I said earlier, this book is a must-read for all law, commerce and finance students and professionals. As a reader, you will know more about the RBI, it’s working, coordination with other Ministries, etc.



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