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Y.V. Reddy disapproves of RBI's insolvency stick to tame NPAs (Lead)

New Delhi, Nov 3 (IANS) The Reserve Bank of India’s (RBI) move to direct banks to take major debt defaulters through insolvency route to tackle non-performing assets (NPAs) was “not correct” in principle, former RBI Governor Y.V. Reddy said on Friday.

“It is essentially a problem of the public sector banks (PSBs), which are owned by the sovereign. In a way, asking RBI to take the initiative to resolve the problem (of NPAs) is extraordinary,” Reddy said here at the 20th JRD Tata Memorial Lecture organised by the Associated Chambers of Commerce and Industry of India (Assocham).

“In principle, I agree it is not correct. I didn’t say it is not the best option. But the regulator’s measure is special.”

The RBI has identified top bad loans accounts of the banking system for insolvency proceedings under the IBC (Insolvency and Bankruptcy Code, 2016).

Reddy described banking as a business where one needed to take risks.

“Essentially, it is a macroeconomic, banking and public sector problem. If it (NPAs) is fixed quickly, the better,” he added.

Reddy also said if there was a difference in the public and private sector banks’ performance, then it should be attributed to its governance.

“Overall, the problem in public sector banking is a structural one,” he pointed out.

However, he added that he would not like to generalise on the cause of NPAs, as in some cases there was “genuine business loss” while in some it might be due to corruption.

“But the major problem is how to incentivise people to be honest, how to enable businessmen to take risks. The system is not able to incentivise performance. Punishment also requires investment by society. The solution lies in incentivising and not in punishment. Both public and private sectors should enable wealth creation,” Reddy said.

When asked about the recent Rs 2.11 lakh-crore mega recapitalisation boost for public sector banks announced by the government over a period of two years, he said it was the Centre’s responsibility to scour for funds for the public lenders and that is what it was exploring.

He, however, added that the design of recapitalisation was critical for the PSBs.

On completion of one year of the government’s demonetisation move of November 8, Reddy said there had been much debate on the issue.

“It is such a measure that there would be short-term pain and medium-term gains. It’s not complete yet. We have seen the pain in short term and yet to see the medium-term gains,” the former RBI Governor noted.

Talking about the much debated issue of independence of the central bank in India, he said: “There are many who argue that RBI is the creation of the government and therefore, accountable to it. So, too much of independence cannot be justified.”

“There is a basic philosophy behind the arrangement of central bank to be the guardian of money and finance. The idea is to convince people that they can have trust in money and finance (banking system) irrespective of political changes since an independent institution, namely, central bank, has been entrusted with such matters.

“A central bank is an institution created by the government for its own purposes. The government would like to convince people that central banking is independent but would like the central bank to do what it wants. Central bank has to convince the people that it is independent if it wants to be effective,” he said.

This tussle had been there since long and in all countries, and the balance would keep changing, Reddy noted.

He said that price stability, inflation targeting and role of money were some of the objectives of RBI.

“There is need for coordination of monetary policies with other policies. The coordination has to be at two levels — coordination with fiscal policy and financial sector policies within the country, and at global level, with the counterparts in other countries,” he said.

On whether the RBI should go for a cut in key lending rates to boost economy, he said it was a perpetual dilemma before the central bank.

“Lending is out of savings, and interest rate cuts also affect savings. Current problem is not that banks are not lending, it is because they are choked due to NPAs. If lower interest rate will increase lending and not affect savings, then it should be done. It is the responsibility of the RBI Board,” he said.

When asked to comment on a number of countries adopting cryptocurrency, including bitcoins, he said: “If there can be a backing by the sovereign to cryptocurrency, then it is fine. But if I can’t understand it, I will not allow it. Let others experiment and succeed first. We as a country have enough issues to focus on.”

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