RBI Board meeting of 19th November, 2018 : Beginning of a new era?

RBI Board meeting of 19th November, 2018 : Beginning of a new era?

Monday, November 19, 2018

In the just concluded Reserve Bank of India ( RBI)  board meeting  , RBI  has agreed to almost all  suggestions ( if not instructions ) of the Government. Government has been pushing RBI to take steps to  increase credit flow to the Micro Small and Medium Enterprise (MSME)  sector , to reduce  the minimum capital requirement , to increase liquidity for  shadow banking entities and to relax the PCA rule for the public sector banks. 

Before this  meeting lots of articles have  been floated by taking sides of either parties and this has raised the inquisitiveness of the common people about the  outcome of RBI board meeting . Hardly I have ever seen the tea table discussion around the outcome of RBI board meeting in my last two and half decades of banking career. However , at the end,  it turns out to be a damp squib with RBI seems to capitulate  by agreeing to almost all suggestions of Government related to credit flow in the economy .

Critics of Government may argue that  RBI has surrendered its autonomy to great extent to the Government in today’s meeting . Without getting into the merit of this view , my observation is that  it may be a starting  point of a new role of RBI. In the case of credit delivery related decisions, it seems that Government would have last say and RBI would have to agree to the Government decision . Government would give priority to GDP growth over the quality of credit . Government seems willing to take the risk of higher NPA to register higher GDP growth . Government may say that it is willing to provide higher capital to state run banks to fund more credit even when NPA  goes up due to steep credit growth . Similar  strategy has been adopted by RBI during the tenure of  erstwhile UPA I government in the year 2008 when Global Financial Crisis crippled the financial system .  A section of banking analysts attribute this blanket restructuring of 2008 as one of the major reasons of current NPA problems of Indian banking system.

Indian banking system has witnessed sharp increase in NPA ( specially in the large and mid corporate borrower ) from 2015 almost seven years post the general restructuring of 2008. Decisions of RBI related to incremental credit flow to MSME sector taken on  its board meeting of 19th November 2018 has the potential of increasing substantial NPA in the MSME sector in future. Considering the next global recession round the corner ( current economic growth cycle has already crossed a decade - one of the longest run of global economic growth in recent times ) , the impact of today’s decisions may be felt much earlier this time .

Without wasting any time , both RBI and Government should sit together and adopt a completely innovative approach of lending for Indian banks. If banks continue to follow the existing lending process , we are surely heading for substantially higher NPA  in next three to five years down the line  with large corporate , mid corporate and MSME borrowers all contributing towards the NPA of the Indian banking system .  However , if Government and RBI can design proper lending strategy which has to be completely different from what is followed today , going forward ,  the benefit of incremental GDP growth due to outcomes of today’s RBI board meeting would reduce the NPA. Otherwise , Indian economy  should brace itself for a very fragile banking system .