Close to two years after his resignation as the governor of the Reserve Bank of India, Urjit Patel is putting all speculations about his abrupt decision to rest. In his book Overdraft—Saving the Indian Saver released on Friday, Patel notes that attempts to dilute a new bankruptcy law caused disagreements between the Union government and the central bank, leading to his resignation.
The rift centred around a February 2018 circular issued by the RBI, which forced banks to immediately classify borrowers as defaulters when they delayed repayments, barred defaulting company founders from trying to buy back their firms during insolvency auctions, and push them into bankruptcy if a resolution timeline was not met. The government seemed to lose enthusiasm for the legislation in the middle of the year he left the central bank, Patel writes in the book.
"Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued," Bloomberg reports citing Patel from the book. "Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation's operational efficiency."
According to Patel, the government was probably of the view that the "deterrence effect—'future defaulters beware, you may lose your business'" had been achieved. He adds that "there were requests for rolling back the February circular" and "a canard was spread" to discredit the rules, including by incorrectly suggesting that small businesses would suffer disproportionately.
It is to be noted that in a surprising decision, the Supreme Court had last year struck down the RBI's February circular. The decision "made the insolvency regime vulnerable, possibly brittle," Patel writes, and warned that subsequent changes risk reversing gains from efforts to clean one of the world's largest bad-loan piles.
"Since the time-bound threat of insolvency application is not credible anymore, it is unclear what threat points will compel resolution in 180 days (or, for that matter, even 365 days)," he adds in the book.
Patel, who has not revealed much even in his book, however, notes that “lawyers who had agreed to represent the RBI in the Supreme Court (SC) dropped out at the eleventh hour, literally the night before the hearing,” when talking about central bank’s new resolution framework, which was challenged at the apex court.
At large, the book apparently focuses on the banking system’s massive non-performing assets problem, its effect on the economy and financial stability and the way forward. The reticent former governor also does not shy away to pin the blame on the UPA government for allowing the build-up of large non-performing assets at public sector banks (PSBs) by failing to create risk controls or ensuring adequate management.
"The government is responsible for ensuring adequate capital for banks that are under its ambit on a durable/sustainable basis. The dominant owner pre-2014 didn’t question risk controls in government banks even as it received significant dividends," Patel writes.
Patel took over from Raghuram Rajan as the central bank governor in September 2016, until his untimely exit in December 2018. The two-year period was eventful with the Centre's demonetisation move coming just two months after him taking over the office.
At the same time, the relationship between the Centre and the RBI had reached a new low during Patel's tenure. In the wake of the PNB scam, Patel had said in a speech that the RBI did not enjoy the same powers to pull up public sector banks as it did private sector banks. Reportedly, Patel was also not happy with the government's demand to release funds held in the RBI’s reserve. Patel had contended the RBI reserve was necessary to insulate the Indian economy from external shocks.
Around the same time, RBI deputy governor Viral Acharya, who also later cut short his tenure after Patel's resignation, invited the government's flak when he said at a public event that undermining central bank independence could be “potentially catastrophic”, indicating the authority was pushing back against government pressure to relax its policies and reduce its powers ahead of the general election which was due in May, 2019.
