Monetary policies and reforms

MONETARY MANAGEMENT AND INSTITUTIONAL REFORMS: S.S. Tarapore; UBS Publishers and Distributors Ltd., 5, Ansari Road, New Delhi- 110002. Rs. 395.

THIS BOOK by a former Deputy Governor of the Reserve Bank of India consists of published articles. The author, being an eminent economist with successful experience in banking and finance, has covered a wide range of topics of interest. As these articles were published about two years ago in the context of certain developments and incidents occurred at that time they have naturally lost the relevance and importance to some extent. However, in view of the author's eminence and experience as central banker, he has in this book projected his views and opinion which are refreshingly different from official thinking of the RBI and the Government. The subjects covered have been classified under appropriate headings for cogent presentation. Although there are 11 chapters they can be broadly grouped under three headings viz., monetary policy and practice, banking and non-banking sector reforms and public debt.

As far as good monetary policy is concerned the author is of the opinion that there is no justification for repeated reduction in the interest rate with a mistaken notion or under pressure that making credit available to industries at a cheaper rate will accelerate growth. But the consequential low deposit rate certainly affects the savings and savers. While he is happy with the RBI's ability to tighten the monetary control at the right time he wonders at its inability to relax it at the appropriate time. He has rightly observed that one need to bear in mind the dictum that if the real rate of interest is above the real growth of the economy, the economy has to inevitably slow down. The author is critical of over dependence on bank rate adjustment and also frequent changes in the bank rate, thus indirectly forcing the commercial banks to reduce their lending rate. He wants the RBI to employ more effectively the mechanism of CRR and open market operations. He has made quite a few suggestions relating to monetary policies and cautions the Government and the RBI that monetary policy cannot resolve the major economic problems of the economy.

While dealing with matters relating to the banking sector reforms he has touched upon the role and limitations of the Deposit Insurance Corporation, has emphasized speedy implementation of the Verma Panel report, has exposed the weakness of urban co- operative banks, besides covering BIS capital adequacy norms, UTI and non-banking finance companies' problems.

Despite certain specific and logical recommendations of the Narasimham committee, the Government and the RBI have been floundering with the issues and failed to direct commercial banks for effective management of NPA and the reduction thereof to an acceptable level. Commercial banks complain bitterly on the inefficient legal system, indifference of borrowers — whether small or large in repayment of loans and also the policy of directed lending for political purpose under the guise of social justice.

Most bankers lament that borrowers, by and large, are not serious about repayment and blame them squarely short of calling them dishonest. But the fact remains that large-scale industries, small-scale industries and weaker sections face countless problems in their business activities and their failure to repay loans is more often due to economic causes than bad intentions. The Verma panel has diagnosed areas of weakness of banks in this regard. It has correctly identified the problem and suggested suitable measures to restructure and rehabilitate weaker banks and also specified the role of the government as the owners. But unfortunately bad debts are not one-time affair in the bank but a continuous problem, which seems to elude effective solutions. When the commercial banks, which are strictly regulated and effectively controlled, could not manage and reduce non- performing assets it is no surprise that the position is precarious in the case of urban co-operative banks and the NBFCs. While the NBFCs have by and large failed miserably causing severe damage to the saving public, the problem is raising its ugly head in urban co-operative banking sector. The problem of the Madhavapura bank is not a stray case, it continues with the Krushi Bank. Perhaps, it is not the end of the problem in that sector and it is likely to engulf many more banks in the near future. The author has made prophetic comments in this matter with vision and concern.

It is disturbing to note that the crisis is not confined to banks and the NBFCs but also afflicted the UTI and other financial institutions. The author has dealt with the UTI's problems of 1998 and warned the management of the UTI about the wrong policies pursued by them for several years. The public look at the UTI and public sector banks as safe havens for their hard earned money despite disturbing reports published now and then about their sickness, financial irregularities and mismanagement. The public believe that the Government will step in and reimburse the depositors cent per cent when the bank or the UTI fails. The Government, the RBI, banks and the UTI are well aware that it is totally false. In case of severe crisis no one can be saved. All along, the Government merrily provided additional capital to loss-making banks and now with their own financial crunch they started directing sound and rich banks to invest in weak and mismanaged institutions. The case in question is the commercial banks' contributions to the UTI and the IFCI at the behest of the Ministry of Finance. It is only a matter of time when the whole edifice of the financial sector is rendered sick by the short- sighted salvage measures. The RBI and the ministry talk about second generation reforms while even the first generation reform measures in industries, trade, agriculture and financial sectors have not been implemented with speed and sincerity. The issues relating to restructuring of banks, amalgamation and merger, privatisation, autonomy and accountability of the chairman and the board seems to be a distant dream. Considerable improvement has to be made and stability has to be ensured in the implementation of norms relating to classification of assets, capital adequacy, income recognition and profitability to align them with international practices.

The author has rightly observed that in the case of all financial institutions almost 100 per cent of risk is borne by depositors, subscribers to bonds/ units and not by the RBI, the Government and the management of banks and financial institutions. This is true even in developed countries but more so in India with a weak government and weak regulators. It is only when this stark truth is realised by savers and hapless investors, better discipline and efficiency will be enforced in these organisations.

As far as the public debt, Mr. Tarapore has paid compliments to the RBI for its commendable performance in managing public debt and also the operational efficiency in garnering about Rs. 1,00,000 crores every year. As at present it is the institutions, which are subscribing to government papers, and individuals are neither interested nor encouraged. Several steps taken by the RBI in the past to develop the retail market have not proved effective. In a way it is sad that the tax regime favours capital market instead of government debt. For instance dividend income is tax-free but not the interest earned on government debts and bonds. Although income from mutual funds is exempt from tax it is not applicable to gilt funds. The suggestion given by the author in this regard warrants serious consideration.

His valuable input on gold trade and the RBI periodical reports may facilitate a relook on the policy and procedures adopted in this regard. The book is very useful to all those who want to know more about the monetary policies and the performance of the financial sector.

S. ARUNAJATESAN

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