Tuesday, July 17, 2012


Link: http://economictimes.indiatimes.com/opinion/interviews/banks-have-to-be-board-driven-government-should-not-dictate-their-operations-yv-reddy-former-rbi-governor/articleshow/15011122.cms?curpg=2

"Banks have to be board-driven, government should not dictate their operations: YV Reddy, Former RBI governor"

Some edited excerpts:

There is growing criticism, both internally and overseas, about policy inertia and inept economic management by the government. What is your assessment and what, in your view, should the government do to swiftly address some of the issues on the economic front?

I cannot comment off the cuff. But I will draw back and say what IG Patel's perception of reform is. One major point he made was about the distinction between macroeconomic management and micro-sectional reforms. Macroeconomic management has, by and large, been good in India. Yet some reforms are needed. His emphasis was on sectional reforms and efficiency of the reforms.

The broader aspect is that three areas were not sufficiently addressed. One is the issue of corruption, second is confidence of civil society, and third is higher education. So, in a way, we should not think that if you keep deregulating, it is reforms.
Then there are issues in the global economy. Does that mean we should not move forward? I don't think reforms as contemplated before the crisis should be blindly carried forward. In considering reforms, efficiency should be a criterion. Macroeconomic balance is important. Macroeconomic imbalances create instability. We require growth impulse and it depends on savings and investments and productivity.

Recently, Dr Rangarajan said that even without changing the banking regulation laws, the RBI could consider issuing bank licences. Do you agree?

No, I don't agree. Purely from the global crisis situation, all over the world, they are very strict from the regulatory perspective. Even before they experienced the crisis, the Reserve Bank had requested some regulatory framework for regulating the banks, that is absolute necessary minimum.

So if the government is not able to give minimum power to the regulator, it is inappropriate to give any more licences till the law is changed and the regulator has enough regulatory (jurisdiction/freedom), more so because the type of entities that are likely to get the banking licences.

You already have Indian corporates in the mutual fund industry, they have got interconnected insurance companies, they have interconnected NBFCs, and then if you add banks, then it going to be extremely difficult for a regulator. The whole conglomerate structure - it is not only going to be a financial conglomerate, but an industrial-cum-financial-cum-banking conglomerate - becomes too big to regulate.

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