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By C. R. L. Narasimhan
Y. V. Reddy
A relaxed Reserve Bank of India Governor, Y. V. Reddy, took on a few questions connected with the mid-year review of the Monetary and Credit Policy that he had presented on November 3. QUESTION: The accent on continuity in the style and substance of monetary policy is understood. Demystification of arcane monetary issues has been a goal of the policy .Can you elaborate on what you say is the two thrust areas - customer service and consultation? ANSWER: I'll explain the first with a few examples. Take exchange rates. As you are aware there are experts who argue for a flexible rate regime in this country. In a country like India that may not be the ideal solution. A relatively small importer or exporter has no way of hedging his risks either by himself or through the market mechanism. There is no point in exposing them to huge volatility by leaving them to unfettered market forces. I believe some other countries have suffered because of this. In that context, fighting volatility or avoiding volatility by the central bank is in the nature of a public good. A public good that is made available to the market participants because of the nature of the market, which is not fully developed here. Some of the market intermediaries and some of the participants do not understand the risks. It happens all the time. In other countries when people take risks, they are informed risks. So it is a slow process of educating as well as building institutions. But what the RBI is doing while trying to reduce volatility is to slowly but surely give room for some amount of flexibility, a gradual and slow process in which market participants have to learn by themselves. Consultation comes in a different context — of a regulatory role. When you talk of a regulatory role there is market pressure for efficiency and stability. There is also some amount of self-regulation. We have to balance these factors. The point is in a transforming economy like ours (especially in a structural sense) the participants have varied backgrounds. Take the public sector banks, having an overhang of the past. In many other countries the overhang problem was removed by creating asset reconstruction companies, by taking over the losses. In our country we have asked the banks themselves to take the remedial steps. It is too much to expect the PSBs to compete in a level playing field with those who do not have an overhang. Then there are foreign banks that have expert skills in dealing and treasury management. In a regulatory sense therefore, as we move forward, we have to consult with the participants so that we capture their respective strengths and move together. Consultation adds to our understanding of the constituents. It makes it easier for the regulators. Third, there are issues relevant for the common person. The main item here is transaction costs. As we emerge from a planned era, a semi-bureaucracy there is certain amount of deregulation at the top. But in a number of areas, forms, procedures and the like, there is an overhang. Those we have to address. That is why we have created committees. While we have succeeded in a limited sense the RBI will have to replicate such success across the banking system. Public sector banks have problems, such as absence of incentives, vigilance enquiries. The problems have over time become so acute that the authorities will have to find solutions within the monetary policy framework itself. For it seriously affects credit delivery The following points have already been made and will help in understanding the issues. (a) Stickiness in lending (interest rates) is not restricted to the PSBs. Stickiness is endemic. There has been a downward rigidity in many sectors. Two, relative to foreign banks and private banks, the interest rates and prime lending rate of public sector banks are lower. Three, an interesting point — the share of foreign and private sector banks in total credit is growing. Even if the price is higher their share is expanding. Four, viewed in the aggregate, if you take, say 1995-96,when the nominal and real interest rates were high the credit growth was high. The idea of one to one correlation between the interest rates and aggregate bank credit on the one hand as well as between the bank rate movements on the other is simply not there. (b) Market related salaries are not feasible-you cant just give it to the number one man and deprive others. Market related incentives also mean a market related freedom to hire and fire. I don't think PSBs are ready for it. After all they have 90 per cent of the country's best talent with them. So incentives are not critical in my view. (c) Vigilance: I agree that there must be in a structural sense incentive to perform. Rules, regulations, promotions and the like in PSBs are not conducive to employee performance. On the other hand there are serious disincentives. One fundamental flaw is that we are treating a commercial banker, under the Prevention of Corruption Act, as a bureaucrat. The banker is supposed to take risks, face risks, negotiate and settle risks. I am happy to state that the legacy of the past is being addressed. The Central Vigilance Commissioner and his team are reworking the vigilance manual so that a banker's action will be evaluated in a commercial environment and not in any other. We have held discussions and are hopeful of a satisfactory outcome.
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