by admin | May 25, 2021 | Banking, Corporate, Corporate Governance, Economy, Markets, News, Politics

RBI Governor Urjit Patel
Mumbai : Dwelling upon the spillover effects of the “quick fix” solution of farm loan waivers to ease farmers’ distress, RBI Governor Urjit Patel has said that the government instead should move to more fundamental solutions, including crop insurance and opening up the farm economy to market forces and open trade.
“In the absence of coordinated and sustained efforts to put in place elements of a virtuous cycle of upliftment, loan waivers have periodically emerged as a quick fix to ease farmers’ distress,” Patel said here at a seminar on ‘Agricultural Debt Waiver – Efficacy and Limitations’ on Thursday evening.
“From a policy perspective, what needs to be done is to move away from palliatives in the form of debt relief and into a more fundamental solution that enhances welfare all around,” he added.
The Reserve Bank of India (RBI) Governor said that many elements of this optimal approach are well known — crop insurance, infrastructure, irrigation, technology-enabled productivity improvements and opening up the farm economy to market forces and open trade.
Patel lauded the government’s initiatives like establishing a nation-wide market for agricultural produce, through eNAM, the Pradhan Mantri Fasal Bima Yojana, the Pradhan Mantri Krishi Sinchai Yojana, the Paramparagat Krishi Vikas Yojana and the national drive towards financial inclusion.
“The coming to fruition of these initiatives holds the potential of achieving the mission of doubling farmers’ income over time. We need to ensure that their benefits percolate down to all the intended recipients,” he said.
While in no way detracting from the acute distress that farmers face with every disruption in crop cycles, it is important to recognise that there are externalities that spill over beyond the farm sector and eventually, other economic agents and other parts of the economy get affected, he added.
He said that the spill over effects need to be minimised so that the incidence of the burden on the taxpayers can be reduced.
The first impact of any loan waiver is on the balance sheet of lending institutions, be they formal or informal, Patel said.
“This is inherent in the inevitable lags, in the timing of impact and the arrival of compensation from the government. In this, the quality of assets deteriorates. Loan waivers impact the state of public finances in the form of higher than budgeted revenue expenditure. This, in turn, has to be financed by additional market borrowings which pushes up interest rates, not just for the states but for the entire economy,” he said.
Even if the loan waiver is accommodated within budgetary provisions, it will force cutbacks in other heads of expenditure, the RBI Governor noted.
“If, on the other hand, budgetary provisions are exceeded, higher spending and widening of the fiscal deficit have, as experience has shown, inflationary consequences and possible spillovers that could undermine external viability. Also, research points to adverse welfare effects because, ultimately, loan waivers involve a transfer of resources from tax payers to borrowers,” he said.
Patel said that there is a gamut of issues that have intensified the anguish of our farmers and farm loan waivers have brought forward the urgency of designing lasting solutions to the structural malaise that affects Indian agriculture.
“On the other, there are concerns about the macroeconomic and financial implications, how long they will persist in impacting the economy, the possible distortions that they could confront public policies with and the ultimate incidence of the financial burden,” he said.
India’s agrarian economy is the source of around 15 per cent of GDP, 11 per cent of our exports and provides livelihood to about half of the country’s population.
The importance of the sector from a macroeconomic perspective is also reflected in a significant flow of bank credit to finance agricultural and allied activities relative to other sectors of the economy.
Outstanding bank advances to agriculture and allied activities have risen from about 13 per cent of GDP originating in agriculture and allied activities in 2000-01 to around 53 per cent in 2016-17.
—IANS
by admin | May 25, 2021 | Banking, Corporate, Corporate Governance, News

(Photo Courtesy: Reuters/ Danish Siddiqui)
By Ira Dugal
Urijit Patel looks to take Raghuram Rajan’s inflation fighting agenda forward and not sway from the RBI’s crusade against bad loans in the banking sector
Mumbai: When Urjit Patel takes over as the 24th governor of the Reserve Bank of India (RBI) next month, it may feel like a case of “the more things change, the more they stay the same” at the central bank.
Patel’s choice as the successor to Raghuram Rajan is a vote for continuity and that is what markets and bankers are expecting as the new governor takes charge.
The continuity will come in terms of taking Rajan’s inflation fighting agenda forward and not swaying from the regulator’s crusade against bad loans in the banking sector.
Patel, in fact, is the architect of the RBI’s new monetary policy framework. In January 2014, a committee headed by him had suggested crucial changes to how the central bank approaches monetary policy. It suggested that the central bank use consumer price inflation as the nominal anchor and also mooted the idea of a flexible inflation targeting framework. Both these changes have now been institutionalised with a 4% (+/-2%) inflation target being put in place.
Get the MPC functioning
The other big change that the Patel committee recommended is the setting up of a monetary policy committee (MPC) which will make decisions collectively, replacing the current system where the governor is the sole monetary policy decision-maker. The government has agreed to this and the committee is in the process of being set up.
Rajan has suggested that the next monetary policy review due in October, could be conducted under the MPC framework.
As such, the first and the biggest task for Patel will be to get the MPC functioning. As the central bank transitions to this new system of setting monetary policy, it will be equally important for Patel to communicate to markets and other stakeholders on how they should internalize these changes in monetary policy setting.
“Dr Patel’s appointment augurs well for continuity as he was part of formulating the design of the monetary policy framework. This would also imply that the RBI will continue to build on the path that Rajan has laid out to manage inflation,” said Shubhada Rao, chief economist at Yes Bank.
Keep the inflation fight alive
Consumer price inflation for July rose to above 6%, thereby breaching the upper limit of the RBI’s comfort band. As Patel takes over and leads his first monetary policy review, he would need to make an assessment if the accommodative stance that the RBI has maintained since the start of last year needs to change. Recent inflationary pressures have been led by higher food prices which may subside. But of the RBI and Patel’s judgement is that upside risks to inflation have risen, they may start to sound less dovish than they have in recent policy statements.
The market sees Patel has a hawk which means that hopes of easier monetary policy under the new governor would subside. Bond yields which have dropped nearly 40 basis points since Rajan announced his departure, may move up marginally on Monday, according to a senior banker who declined to be identified. Patel is also seen as someone who is not particularly generous with liquidity and until recently had maintained that liquidity should be in deficit mode in order to meet the RBI’s inflation goals. This has now changed and the RBI has committed to maintaining neutral liquidity which has come as a relief to markets and bankers. With that decision taken collectively by Rajan and Patel, markets expect the stance to continue.
“Dr Urjit Patel’s appointment provides continuity to the monetary policy making especially related to inflation targeting. It reassures both debt and equity markets of continuity in policy making at the RBI,” said Nilesh Shah, managing director at Kotak Mahindra Asset Management Co. “Market participants will be keenly looking forward to the next credit policy to hear the new governor’s views on the macro economic environment and the agenda ahead,” Shah added.
Conclude the bank clean-up
The third big item on Patel’s agenda will be ensuring that the bank balance sheet clean-up reaches its logical conclusion. Most of the heavy lifting in this regard has been done and the new governor will just need to ensure that the focus doesn’t shift away from this task.
“Urjit’s experience is a nice blend of corporate, public policy & RBI. This will be a seamless transition. At a time of uncertainty over resolution of the NPA crisis in the banking system, Urjit is perhaps the best choice to keep the focus on solving this crisis,” Praveen Chakravarty, co-founder of angel investor network Mumbai Angels, said in an email to Mint on Saturday.
Patel, as the deputy governor in-charge, has not been directly involved in the asset quality review process of bank balance sheets. However, he has worked closely with deputy governor S.S. Mundra who has spearheaded this process.
Patel and Mundra must together ensure that banks now move to the second phase of the clean-up where loans recognised as bad move towards quick resolution.
Communication
One of the perceived weak spots of Patel has been his willingness to communicate with the markets. Patel, seen as a reluctant communicator, is rarely seen out in public giving speeches and putting out the RBI’s agenda. His comments mostly come at monetary policy reviews and markets rarely get to hear from him in between policies.
“Now as the governor, it will be important for Dr Patel to communicate more to explain not just the RBI’s actions but also it’s thinking on crucial issues particularly if there are uncertain times,” said a debt market trader speaking on the condition of anonymity.
In this regard, Patel also has big shoes to fill.
Rajan, an academic, has been vocal on a number of economic and social issues and has been seen as someone who can also explain the RBI’s point of view to the markets, which can often serve as a calming force in uncertain times.
courtesy: Livemint