RBI Annual Report 2016-17: Demonetization and after

RBI Annual Report 2016-17
 RBI Annual Report 2016-17 is most likely to be sunk in the Demonetization debris. Going by the format and content, in recent years, RBI Annual Report has evolved into a comprehensive document which reviews the organization's performance during the year making a realistic assessment, gives details of department-wise assignments on hand and future plans, making it a unique one among annual reports brought out by other organizations in public and private sectors.
Viewed in this context, Team RBI deserves to be congratulated for bringing out a comprehensive, informative Annual Report maintaining the tradition of RBI.
It's unfortunate that media and analysts prefer to dump such documents in the preparation of which so much of efforts including research work have gone into, in sensational debates on just one issue, namely, Demonetization.
Paragraph X. 41 which talks about RBI being still engaged with GOI in the resolution of Pension Revision in the Bank, hangs loose in an otherwise professionally written report. Some of us know the purpose. But for the 'ordinary RBI retiree' it is an expression of helplessness by an organization which she thought performs its duties gracefully and with dignity.
It's unfortunate that people concerned do not open and read the report, but participate liberally in criticizing RBI Governor and the central bank's policies.
RBI's reserves continue to be at a low level (7.6 per cent of total assets against a self-set target of 12 percent).
In the coming days, this Blog will try to carry some thoughts focusing on the content of RBI Annual Report 2016-17.
Today, three articles on ‘Demonetization and after’ published in The Global ANALYST consecutively after November 8, 2016 announcement on the subject by Prime Minister Modi are being revisited. 
M G Warrier

DEMONETIZATION AND AFTER

Demonetization-I
The Global ANALYST, December 2016
Mainstreaming Cash Flows
M G Warrier
Though I am not one of those who follow the impact of planetary positions on individuals’ and nations’ destinies or consult an astrologer when something goes wrong or when I initiate something auspicious, circumstances lead me to think that the current decade is a lucky period for India as a nation. From somewhere leaders emerge and change the way we look at things, giving deeper insight into what is better for the country. While one can remember several names, those of Arvind Kejriwal, Narendra Modi and Raghuram Rajan remain uppermost in one’s mind. First two for creating an awareness about rampant corruption across sectors and political ideologies and Dr Rajan for exposing the link between erosion of nation’s wealth and management of financial sector.
In India, corruption in high places has been recognized as a roadblock to economic growth and distributive justice, by a strange coincidence, almost concurrently with the emergence of economic reforms, liberalization and globalization, circa 1990’s. I would attribute the transformation of the Indian political scene in Modi’s favour, to the India Against Corruption movement, and Modi’s decisive electoral victory to the confidence he could instill in people, about his ability to take a diversion from the status quo and engage directly with the ‘stakeholders’ of corruption irrespective of their positions and political affiliations. Modi’s election promises on handling black money and corruption got converted into votes in NDA’s favour in 2014 elections.
 The leadership provided by Modi enabled the NDA government to initiate action to bring transparency in transactions and plug the holes in porous financial management practices followed by government.   The Reserve Bank of India and several ministries in GOI were already aware of the need to revamp the institutional system in the financial sector and reorientation of policies to suit the changes that had already taken place in the business environment world over. The several measures initiated by RBI to introduce new players in the financial system and a thorough health check up of the loan portfolios of major banks, the GOI focus on strengthening public sector banks and financial inclusion need to be seen in this perspective. Demonetisation of high denomination currencies is a continuation of the measures to mainstream monetary transactions through legal channels.
Demonetisation of Rs1000 and Rs500 notes
As it is primarily a Government of India decision to demonetize highest value currency notes of Rs500 and Rs1000, we can safely rely on the background explained by the Prime Minister while announcing the strong and decisive step on November 8, 2016. After referring briefly his government’s resolve to fight the challenges posed by terrorism, corruption and black money, PM listed the major initiatives taken since NDA came to power, which included (a) the law passed in 2015 for disclosure of foreign black money; (b) agreements with many countries including the US, to add provisions for sharing banking information; (c) the strict law to curb benami transactions, which are used to deploy black money earned through corruption and (d) the scheme introduced for declaring black money after paying a stiff penalty. PM mentioned that these measures have so far brought into the open nearly Rs 1,25,000 crore rupees of black money belonging to the corrupt.
Prime Minister announced the decision that “the Rs 500 and Rs 1000 currency notes, presently in use, will no longer be legal tender from midnight tonight, that is November 8, 2016”. He qualified this step as a continuation of earlier measures to break the grip of corruption and black money and said that the step will strengthen the hands of the common man in the fight against corruption, black money and fake currency. After explaining the procedural formalities and timeframe for deposit/exchange of  notes which are no more legal tender, PM concluded his speech admitting possibility of temporary hardships to citizens and exhorting all to join the ‘festival of integrity and credibility.
As the measure had an impact on the lives of all, response from the media and analysts has been cautious and ‘measured’. Though most of the people refrained from questioning the necessity of the step, as nobody wanted to be seen themselves as advocates of the corrupt and hoarders of black money, many raised objection to the lack of preparation for implementing such a large scale operation. It has to be said to the credit of bank employees that within the constraints, the implementation of the measure was handled efficiently.
Objectives of demonetization
Motives behind the move which has been variously described as ‘Surgical Strike’ and ‘shock therapy’ has been well articulated in Prime Minister Modi’s speech announcing demonetization. I am not joining the hazardous game of making further guesses which many in the electronic, print and social media are already at, as part of their ‘regular job’. Common man would console himself that all the pain was not in vain, even if the measure partially succeeds in ‘purifying’ the economy and checking growth of corruption. The mainstreaming of idle currency will bring a large amount of ‘hidden’ wealth into books of accounts and that definitely have not only positive tax implications, but will be a deterrent to further accumulation of wealth from ugly sources. Compulsion to do more transactions through banking channels will be a disincentive for further ‘import’ or local printing of counterfeit currency.
Future course
The mainstreaming of ‘idle currency’ will have to be quickly followed up with measures like regulating transactions in gold and property by making mandatory provisions to route them through banks and sooner the political leadership (as different from the government) comes to a consensus on such measures, the better for the country.
A couple of issues, which even analysts of repute avoid mentioning, may be for fear of becoming unpopular, but will have long term beneficial impact for the country’s economic growth and India’s image among developing/developed nations, remain still in the backburner. They are handling the taxation of agricultural income and mapping the assets including gold and jewelry lying unaccounted in various pockets. Government could start with making it mandatory to report periodically the value of assets above a pre-decided threshold level, held by individuals and registered institutions.
Some afterthoughts
In the whole process of implementation of demonetization of Rs500 and Rs 1000 notes, government and banking system (including the regulator) missed a couple of steps they could have taken much earlier to November 8, 2016, the date on which the demonetization was announced, had the system applied its mind. These steps relate to readying at least majority of ATMs for dispensing the new design high denomination notes, print order for which had been given long back and stocking low denomination currency in semi-urban and rural areas where people were still using more hard cash than ATMs or electronic payment systems for their day to day money transactions. In hindsight, this could have been managed without affecting the ‘secrecy’ needed to be maintained while making the announcement.
Till recently, banking did not make its physical presence in India, much beyond ‘walkable’ distance from points where a four-wheeler can reach. It didn’t make much difference when ATMs took over the work of cash dispensation from banks, as ATMs crowded cities and towns and Public Sector Banks which were forced to go  to rural areas and open branches or service rural clientele too, went by and large by the ‘walkable’ distance rule. Those who are responsible for this state of affairs are enjoying the fun of being in the opposition now. The imported concepts of Banking Correspondents is yet to take roots in India. An RBI Governor (Dr Raghuram Rajan) who understood the problems and initiated some revolutionary reforms in the financial sector including the concept of small banks and  as using Post Offices as conduits for banking services to improve outreach was eased out fast.
As the idea of phasing out Rs 500 and Rs 1000 notes were somewhere in the back of the mind of policy makers, even while print order for Rs2000 notes were being given and instructions were being issued for increasing supply of lower value notes for circulation, without affecting the secrecy of demonetization announcement, simultaneous measures should have been taken to:
(a)  Prepare at least fifty per cent of the ATMs ready for dispensing new high denomination notes of different dimensions and
(b) Suck out Rs500 and Rs1000 notes from rural areas which could have been done in the guise of poor people who were really having problems in handling high denomination currency. Many of them were dependent on daily wages which were less than Rs500!
One possible reason for the chaotic position is outsourcing of work by institutions in piece-meal to agencies which have no moral allegiance to the institutions which hire them. We need to invent new strategies to build up reliable relationships between masters and servants, in the modern era of hiring and firing at higher levels and contract/bonded labour at lower levels.
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Demonetization II
The Global ANALYST, January, 2017
A God-sent Opportunity to Cleanse the System
M G Warrier
Opportunity to govern a country, like life, comes sans ‘rewind’ and ‘fast forward’ buttons.  Prime Minister Narendra Modi’s case is no exception. Without going astray in a philosophical mood, let me straight come to the point. Right or wrong, Modi has no option to go back on the announcement of November 8, 2016 withdrawing the ‘legal tender’ status of high value notes (Rs500 and Rs1000). The only option now before government and the nation is to implement what is now called in general parlor as ‘demonetization’ with least pain to the people and ensure that the country is benefited by achieving the purpose clearly mentioned while announcing the decision namely, ‘fighting black money and terrorism and minimizing presence of fake currency in the system’.
Unintended consequences
Former Prime Minister Manmohan Singh concluding his article “Making of a mammoth tragedy” in The Hindu on December 9, 2016  observed asunder:
‘Black money is a menace to our society that we need to eliminate. In doing so, we have to be mindful of the potential impact on hundreds of millions of other honest citizens. It may be tempting and self-fulfilling to believe that one has all the solutions and previous governments were merely lackadaisical in their attempts to curb black money. It is not so. Leaders and governments have to care for their weak and at no point can they abdicate their responsibility. Most policy decisions carry risks of unintended consequences. It is important to deftly balance these risks with the potential benefits of such decisions. Waging a war on black money may sound enticing. But it cannot entail even a single loss of life of an honest Indian.’
Conceding his right to be concerned, let us also remember, all martyrs were honest citizens. The arguments put forth only explains the rationale behind his reluctance to take decisions during the ten year period when Manmohan Singh was Prime Minister.  Manmohan Singh’s brief, but forthright indictment of demonetization in Parliament was more explicit. Though the harsh language seemed having been smuggled into the speech by his sponsors, by and large the outburst represented his resentment with the management of economy and financial sector in India for decades now, simmering in his mind.
The managers of the Indian Economy and the Indian Financial Sector, who opted to procrastinate action against the looting of the common man in India post-liberalisation should pro rata share the entire blame contained in the Manmohan Singh’s 6 minutes speech and his laments quoted above. Generations to come will remember MMS for this speech, as it is not a political speech, but one backed by long years of experience as economist of international repute, central banker, finance minister and Prime Minister.
Dr Manmohan Singh’s advice to ‘reflect’ on the content of his speech needs to be taken seriously by all including the victims(common man) and factored in, in their future action plans. Instead of throwing the ball back, alleging that MMS did not act or speak at appropriate times or in appropriate forums, policy makers should opt to commission the former PM’s experience and wisdom  to make midway corrections in the crusade against corruption, fake currency and terrorism. Once he cools down, definitely he will help and never leave you in the lurch. After all, having managed an unwieldy coalition for a long time, more than anyone else, Dr Manmohan Singh is aware of the constraints with which governments work.
Manmohan Singh is not alone. Bloomberg published a story filed by Vrishti Beniwal & Anirban Nag captioned “Central banker missing in action as India escalates war on cash” referring to the low key participation of RBI in managing the post-demonetization problems in banks. Following closely on the heels of a BBC lament about how India will handle 20 billion pieces of useless currency notes, Bloomberg story was interesting reading, indeed. Let us not underplay the anxieties of external agencies, though they have only pedestrian interest in India’s real problems. Let us have a look:
First, RBI Governor has spoken just only once, since November 8 announcement of demonetization. Earlier, someone had researched and found out that during the entire 2 years plus tenure as Deputy Governor, Urjit Patel had made only one public speech against the tally of fifty-plus, posted by one of his colleagues and two dozen posted by his immediate predecessor Dr Raghuram Rajan.
 To put records straight RBI Governor did speak to media more than a couple of occasions and clarified the central bank’s position on currency management and problems faced by banking sector. Of course, the leadership team in RBI met the press formally after the monetary policy announcement on December 7.
Two, the observation “a senior bureaucrat was tasked with firefighting”  is based on a senior Secretary in the Finance Ministry explaining the measures taken by GOI to ameliorate the inconvenience caused by withdrawal of the legal tender character of Rs500 and Rs1000 notes announced by PM on November 8. In the given context the official was doing his assigned duty, while RBI was busy with ‘follow up’ measures. Robert  Hocket, who talks in ‘general’ terms, appears to be totally out of touch with the Indian context.
Three, K C Chakrabarty, another person whom the writers have contacted, has already gone on record saying that when he was RBI Deputy Governor, the demonetization proposal received in RBI (he said it was immaterial whether the proposal was made over the phone or in writing) to which, in his words, “We said, no”. So the ‘benefit of doubt’ offered by him to Urjit Patel must be genuine.
Four, though repeated references are being made to 1978 demonetization in the media by analysts, the context, content and magnitude of the 2016 measure make any such comparison ridiculous.
Did anything go wrong?
It is always easy to be wiser after the event. Let us not brush aside the criticism against inadequate preparations made before demonetization of Rs1000 and Rs500 notes announced by Prime Minister Narendra Modi on November 8, 2016 or for that matter the gravity of the sufferings the measure inflicted upon unsuspecting innocent elders and poor people in remote villages of India. It is, in a way, comforting to see that, media and vigilant social activists are making work easier for those who do post mortem, audit, post-project analyses of project implementation, inspections, various judicial processes and enquiries/investigations by recording evidence on an ongoing basis.
The November 8, 2016 announcement
What one understands from Prime Minister Narendra Modi’s November 8 speech announcing that high denomination currency note of value Rs500 and Rs 1000 will not be legal tender from the midnight of Tuesday, November 2016 is that the action is in exercise of GOI’s power to alter the legal tender character of currency notes.
The GOI announcement does not impact the RBI’s promise to pay ‘value’ or the sovereign guarantee printed on the currency note. Therefore, legally, it would be wrong to make any adjustment in Reserve bank of India’s balance sheet with reference to the quantum of notes surrendered within any stipulated time limit. Such adhocism in accounting practices can lead to erosion of trust in institutions like Reserve bank of India.
The misconception which got circulated through media, though in a small circle, that it would be perfectly legal to accept old Rs500 and Rs1000 notes  in the normal course of transactions till December 30, 2016 or March 31, 2017(As RBI will be exchanging these notes till that date) has since been removed. Extended time limits allowed for certain essential services like Railways, petrol outlets, hospitals etc relate to accountable transactions and these entities will be able to show source of further accumulation of high value notes after the midnight of November 8, 2016. 
The measure has been accepted, by and large
By and large, national and international media and monetary institutions have accepted the rationale behind the demonetization. While some were cautious in their appreciation,  New York Times quoted an expert saying it was a wise move and went on to observe in an article: “The plan, top secret until Mr. Modi’s announcement, was hailed by financial analysts as bold and potentially transformational for India. It is also a high-stakes experiment.”
 
RBI restoring trust
Dr. Raghuram G. Rajan, then Governor RBI, on September 3rd  2016, at St. Stephen’s College, New Delhi commenced his speech with the following observations:
“Over the last few weeks, I have outlined the RBI’s approach to inflation, distressed debt, financial inclusion, banking sector reform, and market reform. Today, I’d like to first discuss why central banking is not as easy as
it appears  (just  raise  or cut interest  rates!) and why it  needs decisions,  sometimes  unpopular or hard -to-explain  ones,  to be made under conditions of extreme  uncertainty. This will then lead in to my arguments about why we need an independent central bank.”
Rajan’s efforts to preserve India’s central bank in one piece did yield dividends. Reserve Bank of India managed the multi-dimensional threats to the financial system posed by the side-effects of demonetization within the constraints RBI and GOI are working today. The quick absorption of excess liquidity in the system by using the instrument of CRR, fast responses to changing needs in the supply of currency and above all the assurance that the interests of genuine depositors and borrowers are safe need to be seen in this context.
As always, RBI through its monetary policy announcement on December 7, 2016 has once again proved that its decisions are based on its own perceptions and not influenced by media lobbying or other external influences. India could sail through several tough economic crises in the past, only because monetary policy interventions and other measures by the central bank unreservedly supported government policy.
On August 29, 2013, Dr Duvvuri Subbarao concluded his Swan Song on the eve of completion of a tumultuous five year term as RBI Governor with the following observation:
 “There has been a lot of media coverage on policy differences between the government and the Reserve Bank. Gerard Schroeder, the former German Chancellor, once said, "I am often frustrated by the the Bundesbank. But thank God, it exists." I do hope Finance Minister Chidambaram will one day say, "I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists."
Subbarao’s successor Dr Raghuram Rajan  brought  more transparency in the working of RBI and sorted out some relationship issues between GOI and RBI during the 3 year period 2013-16. The transition of Technical Advisory Committee which advised Governor on monetary policy into the present ‘independent’ Monetary Policy Committee, besides unburdening Governor from individual responsibility for all monetary policy decisions has infused more professionalism in RBI’s decision making.
When there is lot of confusion in the air even about the motives of the November 8 announcement withdrawing the legal tender status of high value notes, RBI’s coming  out with the central bank’s perceptions about currency management and related matters will go a long way in restoring people’s trust in the banking system. The clarification given by Governor Urjit Patel that the measure by itself will not have an immediate impact on RBI Balance Sheet should set at rest the speculations about GOI having an eye on a windfall gain from ‘demonetization’. In the business of banking, trust is of paramount significance.
The currency note of Rs 2 and above carries a promise (“I promise to pay the bearer the sum of  …rupees”) signed by Reserve Bank of India governor and a sovereign guarantee (“Guaranteed by the Central Government”). The promise and guarantee are not governed by any date line. Prime Minister Modi’s November 8, 2016 announcement has talked only about the ‘legal tender’ character of Rs500 and Rs 1000 notes and has not withdrawn the promise by RBI to pay value or the sovereign guarantee that accompanies the promise.
Deadlines for exchange/deposit of the affected notes can at best be construed as ones fixed for administrative convenience of implementation of the scheme. Making notional entries in RBI’s books to create income by extinguishing liabilities against notes ‘withdrawn from circulation’ and not reaching back RBI, within a stipulated deadline can have perilous long term implications.
Though so far the gossiping is only in the media, and no proposals have come from the GOI/RBI side, a couple of points need to go on record. There are outer contours up to which governments can play such games taking judiciary and people for granted. The sanctity of public trust need to be preserved at any cost and if governments allow to be guided or lured by possibility of short term gains, the negative impact on financial sector and economy can be a multiple of the notional temporary gains. If one needs an example, such measures will have immediate repercussions on public debt.
Ajay Shah in an article “A monetary economics view of the demonetization” in Business Standard (November 14), observed that “Money is the lubricant of the economy”  which reminds one of a ‘Times View/Counter View’ column about corruption, some years back, where one side argued that ‘corruption is the lubricant of the wheel of economic growth’. The article, by a deft theoretical approach, almost confused the reader to think that money is cash and reduced amount of money in circulation is, by itself, something bad for the economy.
The decision to demonetize presumes hoarding of high value currency for purposes other than normal genuine transactions, existence of fake currency in the system and evasion of tax by off-the-book high value transactions as in purchase of gold and property. Though there have been initial flip-flops, by and large, it appears, Reserve Bank of India has taken care to ensure availability of currency notes in exchange and for withdrawal from banks. Looks, there was a slip in making ATMs ready to dispense new Rs2000 and Rs500 notes.
Slowly the entire world is moving towards a cashless society (different from world without money!) and though India, with the present level of literacy and banking infrastructure, may not be able to keep pace with the developed world, cannot stand still, either.
As regards the success of demonetization now under way, common man would console himself that all the pain was not in vain, even if the measure partially succeeds in ‘purifying’ the economy and checking growth of corruption. The mainstreaming of idle currency will bring a large amount of ‘hidden’ wealth into books of accounts and that definitely have not only positive tax implications, but will be a deterrent to further accumulation of wealth from ugly sources. Compulsion to do more transactions through banking channels will be a disincentive for further ‘import’ or local printing of counterfeit currency.
Go ahead signal from C Rangarajan
Former RBI Governor C Rangarajan’s article “Making the most of demonetization” in The Hindu Business Line (November 16) must give a lot of comfort to those who initiated action for ‘Demonetization’ and the thousands who are working 24X7 for implementing it as efficiently as possible with minimum pain for the common man, as the ‘Go ahead’ signal comes from an informed and unbiased veteran who has the backing of an entire life’s experience in practical central banking with post-retirement association with policy making at the highest level in government.
Former RBI Governor has endorsed the three objectives of targeting black money in the form of currency, funding of terrorism through cash and making fake currency which found mention in PM’s November 8, 2016 speech announcing demonetization, suggesting positive measures to achieve these objectives.
Taking the advice seriously, policy makers need to quicken the measures to prevent further accumulation of black money and to flush out the huge quantities of unaccounted wealth concealed in sectors like gold and jewelry, real estate and accounts abroad, leaving the burden of minimizing the pains caused mainly by planning and logistic problems to executives down the line with guidance from Reserve Bank of India.
The two steps suggested by Rangarajan in this context relating to keeping the tax rates at moderate levels and Electoral Reforms (though not specifically mentioned, government funding of electoral expenses based on need-the rich who fight election should not get this facility- is an immediate priority area) are significant and can go to the drawing board simultaneously with the preparation of Budget 2017-18.
Hardships are real
The hardships experienced by the people of a country which is dependent on cash for several day-to-day transactions are real, though the long term benefits outweigh the temporary inconveniences. The link between corruption and black money and abuse of accumulated cash by miscreants had become unbreakable without some drastic measure of this magnitude.
There is need to simultaneously go vigorously on financial inclusion by activating and use Jan Dhan Yojana(JDY) accounts, timely prevention of use of channels like Railway ticket booking to bypass legal routes for exchange of old high value notes and disincentivize use of currency as a ‘store of value’ brought out in the article should draw the attention of the authorities for immediate follow-up action.
Tasks ahead
When ‘normal’ banking business resumes, and it will, much faster than many of us think, there will be an attitudinal change not only on the side of the clientele, but for those responsible for formulation and implementation of banking policy and the human beings (we have found how far technology can serve you without the men behind the machines during these days!) converting the policy into action plans and the reaching out to the individual depositor/borrower. For a short period, banks need not have to worry about deposit mobilization and big borrowers are, hopefully, aware of the need to keep their assets ‘performing’, so that banks are not forced to categorise their credit as NPAs. Banks should use this temporary respite provided through measures taken by GOI and RBI to put their houses in order. Banks can broad-base lending, improve their outreach to semi-urban and rural areas, increase their direct involvement in lending and supervision of MFIs with which they are associated and improve their image before the public.
If banks start providing credit liberally to small businesses especially in informal sector and GOI/RBI quickly sort out grass-root level issues arising from the sudden sterilization of the functioning of cooperatives (as in Kerala) and MFIs and NBFCs HFCs in most of the states by allowing them to handle old notes already accepted in repayment of loans and other genuine transactions below a reasonable cut off limit, the problems that have surfaced so far may not be insurmountable. It will be another matter, if the dissent is allowed to simmer and issues that need to be resolved by quick policy interventions are left to hairsplitting judicial scrutiny or to be allowed to be sorted out on the streets by masses who are aggrieved.
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Demonetization III

The Global ANALYST, February 2017
Indian Banking System:
Safe, Secure and Trustworthy

Reserve Bank of India Governor Urjit Patel in his brief and crisp 2017 New Year message to RBI family summed up his perception about the events during 2016 and the tasks ahead asunder:
 “During  the year  gone by, we have  continued  our efforts  at restoring  macroeconomic  stability  in  the economy.  While the policy  actions  have already shown positive effects, nevertheless  they are work in progress and need to be fine-tuned constantly to keep pace with the changing environment. Internally we continue to focus on enhancing specialization within the organization, even while strengthening the performance evaluation system to help identify areas requiring improvement and initiating appropriate skilling interventions. ***   *** It is said that nothing is constant except change and we are in the midst of constantly changing times, throwing new challenges our way every day. I am confident that all of us working  together will rise to the occasion and face these  challenges in a manner befitting the reputation of this esteemed organization. Our recent engagement  with withdrawal of SBNs is a case in point.
While on the subject, let me emphasize that one thing we should all zealously guard is the integrity  and reputation of our organization and any act belittling  the same should deserve zero tolerance from all of us. Needless to add, the Ban has achieved the present level of excellence only due to our collective efforts towards a common goal.”
In his speech at the Vibrant Gujarat Investor Summit on January 11, 2017, RBI Governor, among other things, observed asunder:
“***   *** while some government guarantees and limited subventions can help, steep interest rate subventions and large credit guarantees also impede optimal allocation of financial resources and increases moral hazard. The mandates for these have to be narrow, and thus perforce be deployed judiciously, within a regulatory framework, which RBI has suggested. Guarantees increase government’s contingent liabilities, and add to risk premia for its own borrowing. Guarantees per se at the end of the day have limited utility in solving important sector issues. For example, for small scale enterprises, perhaps non- pecuniary and transaction costs related to clearances, inspections and the taxation bureaucracy are more important *** *** our general government deficit (that is borrowing by the centre and states combined) is, according to IMF data, amongst the highest in the group of G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade. We have to take cognisance of these comparisons and facts as we go forward to make progress. Specifically, this will help us to better manage risks for ourselves, and thereby mitigate financial volatility. In the context of an already adverse external environment that I mentioned earlier, thisassumes more importance.
Borrowing even more and pre-empting resources from future generations by governments cannot be a short cut to long-lasting
higher growth. Instead, structural reforms and reorienting government expenditure towards public infrastructure are key for durable gains on the Indian growth front. ”
Excerpts quoted above are only to draw attention to the short speech (accessible at rbi.org.in) which is a timely warning to policy makers in government against taking adverse long term decisions for short term gains. The takeaways in the RBI Governor’s guidance include:
·        Need to balance interest rate subventions and subsidies with real time benefits vis a vis other options to exhilarate economic growth,
·        Not to look at long term government borrowings as a soft option, and
·        Be mindful of criticism from international agencies so that creditworthiness of the nation is preserved.
Keeping the broad perspectives about the state of the economy and perceptions about the tasks ahead spelt out by Urjit Patel, let us have a look at the present status and future prospects of the Indian Financial Sector.
Monetary Policy
Monetary policy announced by RBI on  December 7, 2016 made the following observations which have a bearing on banking business:
“Liquidity conditions have undergone large shifts in Q3 so far. Surplus conditions in October and early November were overwhelmed  by the impact of the withdrawal of SBNs from November 9. Currency in circulation plunged by 7.4 trillion up to December 2; consequently, net of replacements, deposits surged into the banking system, leading to a massive increase in its excess reserves. The Reserve Bank scaled up its liquidity operations through variable rate reverse repo auctions of a wide range of tenors from overnight to 91 days, absorbing liquidity (net) of 5.2 trillion. The Reserve Bank allowed oil bonds issued by the Government as eligible securities under the LAF. From the fortnight beginning November 26, an incremental CRR of 100 per cent was applied on the increase in net demand and time liabilities (NDTL) between September 16, 2016 and November11, 2016 as a temporary measure to drain excess liquidity from the system. From November 28, liquidity absorption fell back and the Reserve Bank undertook variable rate repo auctions of 3.3 trillion on November 28. As expected, money market conditions tightened thereafter and the weighted average call rate (WACR) traded near the upper bound of the LAF corridor on that day before dropping back to the policy repo rate on November 30. All other rates in the system firmed up in sympathy, with term premia getting restored gradually.
Through this episode, active liquidity management prevented the WACR from falling even to the fixed rate reverse repo rate, the lower bound of the LAF corridor. Liquidity management was bolstered by an increase in the limit on securities under the market stabilization scheme (MSS) from 0.3 trillion to 6 trillion on November 29. There have been three issuances of cash management bills under MSS for 1.4 trillion by December 6, 2016.”
Without further analysis or elaboration, let us take the message that when media and analysts were busy with the blame-game, India’s central bank was doing its best to minimize the pains of demonetization not only to the common man by managing currency within the constraints but also to banking system and the economy in general.

Financial Sector Regulation
The Financial Sector Legislative Reforms Commission(FSLRC) went deep into several issues concerning financial sector regulators and GOI’s debt management, but did not do much work on legislative reforms to improve the functioning of the institutional framework which is the conduit for resources mobilization and deployment of credit (banking business, in general). Thus, the institutional reforms, including licensing of new private sector banks, introduction of small banks and payment banks initiated during the Rajan Era in RBI, did not emanate from the recommendations of  FSLRC.
The changes in the outreach, business pattern and expectations of the government of the day from different categories of financial institutions carrying out banking business during the current decade call for a re-look at the Banking Regulation Act to realign the regulatory requirements and methods of supervision to meet the current needs. Such a review will have to consider every aspect including capital adequacy, regulatory requirements, business priorities and specialization, outreach, HR issues  and supervision of the institutional arrangement for banking in India.
HR issues
The government should not further delay a revamp of the policy relating to recruitment, training, placement and compensation strategies across government, public and private sectors. A long-term solution may  have to be found for HR-related problems, including inability to hire experts at market related compensation (this is applicable up to the position of secretary/CEO in government and public sector), skills becoming obsolete in short periods, employees’ reluctance to change and demands from trade unions emanating from job security concerns. There may not be a “fit-for-all” remedy, as the issues are diverse and sometimes sector/institution-specific.

The government and public sector organizations may have to consider how best the “Cost to Company” (C to C) principles can be integrated into their existing recruitment, training, placement and career progression policies. This may involve convincing the existing employees that the changes will only improve the working results of the government departments and organizations they belong to and they will get opportunity to share the benefits and new job opportunities and so long as they are prepared to learn new things/upgrade their skills the infusion of ‘experts’ will not eat into their career progression opportunities. Inter-mobility of executives at higher levels among comparable departments of government and public and private sector organizations should be possible, on transparent norms and strictly based on merits.
 Changes may have to come first in the recruitment and training procedures for IAS and relates services, management trainees in public/private sector undertakings including probationary officers in public sector banks (PSBs). Recent revamping of Tata Administrative Service gives enough food for thought for thinking on these lines. Specialized services like one for banking/financial sector could be evolved for institutions including those in the private sector and all regulatory bodies in the financial sector.

A transparent guidance for a remuneration package based on the paying capacity/need for skills for different sectors and ensuring social security should come from the government without always worrying about what will be the impact on cabinet secretary’s salary or trade union demands. If the government secretary deserves a higher salary, the government should not raise budgetary concerns for not paying it. Instead, merger of some departments and utilizing the surplus manpower for new job opportunities should be a wiser option.

Time is opportune for both private and public sector organizations to have some introspection on their HR practices right from recruitment at the lowest level to the selection of CEOs, remuneration packages, training facilities and social security measures for their employees. While organizations in the private sector may have to review the optimum pressure they can put on their executives and managers, government and public sector counterparts may dispassionately examine and modify their remuneration packages to ensure attracting and retaining competitive talent in the present market scenario. Let us not forget that the civil services, executives and staff of public/private sector undertakings have to supplement the skills of the increasing number of political masters who were not as fortunate to get trained or groomed. The nation is immensely dependent on them for carrying out the development agenda on hand.

Till, perhaps ten years back, employers could depend on a growing population of educated unemployed from which they could hire and fire candidates on their terms. The position has changed with the opening up of the economy and sooner we realize it and act, the better. Dodging real issues could take us back to pre-reform days.
Silver lining
There are positive indications coming from those responsible for advising GOI in matters relating to overhaul of HR policies in banks. According to media reports, on January 5, 2017, speaking on the occasion of business chamber Assocham’s foundation day in New Delhi, Banks Board Bureau (BBB) chairman Vinod Rai observed that “Maybe we are not able to do much with the fixed part of the compensation package but on the variable part, we are hopeful that in the next financial year, we will be able to introduce a far more attractive package, with monetary or non-monetary benefits, to make it more attractive for professionals to enter into the PSB space.”
Rai admitted that PSBs are facing a talent crunch, and entry of more universal and payment banks are expected to add to this, besides recognizing the need for longer tenure at top level in banks to infuse accountability in the system. Rai felt that executive directors or whole time directors or a CEO should be in position at an age where he has got a minimum of six years or more to go in the institution, so that he can be held accountable for decisions.
Rai can convince the policy makers to take good care of Public Sector Banks at this juncture both from balance sheet and human resources management angles, as they account for more than 70 per cent of the banking business in India and any sign of weakness in their functioning will have long term negative impact on the country’s economic growth.
Cooperatives
Cooperatives across the country had more than their due share of  problems post-demonetization. While primary(urban) cooperative banks  whose functioning is similar to mini-commercial banks are regulated and supervised by RBI, the three/two tier structure of cooperatives comprising State and District Cooperative Banks and thousands of primary cooperative societies have multiple regulatory and supervisory oversight involving RBI, NABARD and Registrar of Cooperative Societies(State Government). There is urgency in finding a solution to a problem that has arisen due to continued neglect of an institutional system which has been serving the semi-urban and rural areas of the country, with all constraints. Re are no alternative conduits to ensure  banking service to their clientele in semi-urban and rural areas. The cooperatives need to survive, and ssues like politicization, inadequate skills or problems arising from the dual control of cooperatives by Centre and states should be set aside by judiciary, governments and cooperatives themselves for a short period. There is need for cooperation among these agencies in solving the immediate problems the clientele of cooperatives are facing today.
Several short-cuts are being tried by state governments and cooperatives which can only lead to more complications. The short-cuts include bypassing DCCBs by state cooperative bank (as in Kerala), diverting the business now being done by cooperatives to other agencies and taking the problems to courts which helps in postponing decision-making. At this stage Centre should assert and empower state level task forces involving RBI, NABARD, banks and state governments to resolve the problems locally in a time bound manner.
Indian Banking System is robust
Since the setting up of Reserve Bank of India in 1935 and introduction of the Banking Regulation Act, 1949 (which was partially made applicable to cooperatives in 1966 through legislation), the institutional system providing banking service in India has grown both in size and geographical coverage. GOI and RBI have ensured that depositors’ money remained safe and remunerative in banks and credit flow is being regulated to ensure provision of adequate funds for development needs and economic growth. While there is always scope for improvement, vigilance of the regulator has ensured timely intervention whenever things went wrong in individual institutions or sectors preventing big bank failures. When smaller banks, many in the primary(urban) bank category faced problems mainly on account of mismanagement, damage was minimized by RBI by encouraging prompt liquidation/merger proceedings. While Indian banks are complying with international norms of capital adequacy and income recognition, a lesser known fact is the high reserve requirements (CRR and SLR) work as a support system for government borrowings and serve as a cushion in adverse situations. In sum, despite all criticism, Indian banking System is robust to meet the current challenges and the depositors’ savings are safe, secure and remunerative, and will remain so,  till such time the government becomes greedy and kills the golden goose by exercising falsely assumed ownership rights!

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