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Despite familiarity with RBI, life won't be easy for new guv Urjit Patel

Neeraj Thakur | Updated on: 24 August 2016, 15:08 IST

The world is calling the appointment of Urjit Patel as the new Reserve Bank of India governor as the government\'s attempt to maintain a status quo in the country\'s monetary policy.

But despite his familiarity with the RBI and its policy-making, the challenges for Patel will be much different to the ones faced by his predecessor Raghuram Rajan.

Here\'s what Patel can expect to face:

01
Managing Monetary Policy Committee

While Rajan was the final authority in deciding the interest rates to be charged by the RBI when lending money to commercial banks, in Patel's case, that power would lie with the new six-member Monetary Policy Committee (MPC).

So, if a majority of members of the MPC decide to lower the interest rates, even if Patel does not agree with that view, it would be difficult for him to go against that decision

Of the six members in the MPC, apart from the governor, a deputy governor and another RBI official, there would be place for three independent members to be selected by the government.

It is quite possible that the independent members may take the popular call of reducing the interest rates to meet the demands of the industry and the government, who often prefer a low interest rate regime.

02
Loan database

The banking crisis is the result of a lack of inter-bank data sharing in India. Rajan wanted to develop a large loan database to better map and resolve the extent of system-wide distress.

It would be important for Patel to take that forward, and build up an inter-bank loan database, which helps in flagging any sectoral distress at the beginning of a crisis.

03
Credit appraisal system

Most banks facing heavy loan defaults did not verify the credibility and feasibility of business proposals submitted by the promoters.

To ensure the banks do well in the long-run, Patel will have to ensure that they follow tighter norms before lending money.

04
Corporate bond market

The non-performing assets (bad loans) of the public sector banks have brought into focus the lack of a corporate bond market in the country.

In developed countries like the US, most private sector listed companies are able to raise money by issuing bonds.

However, in India, public sector banks are forced to increase their lending to the industry, to give a push to growth.

Rajan wanted to develop a corporate bond market. Given that Patel was Rajan's deputy, it would be important for him to create a system that promotes a private sector bond market in the country.

05
Maintaining calm in the face of the negative environment

From the day Rajan was chosen to be RBI governor, there was negative publicity for him. A Delhi-based newspaper created an uproar by claiming that Rajan was not an Indian citizen. BJP MP Subramanian Swamy, in a letter to Prime Minister Narendra Modi, said that Rajan was not 'mentally Indian'.

This kind of negative environment is difficult to handle. But given the nature of the times that Patel is holding such an important position in, he will have to ensure that he does not get rattled if, in future, he becomes the target of similar vitriol.

Edited by Shreyas Sharma

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First published: 24 August 2016, 15:08 IST
 
Neeraj Thakur @neerajthakur2

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