ET Now, Mythili Bhusnurmath, Consulting Editor, and Madan Sabnavis, Chief Economist,
CARE Ratings, discuss RBI and rate cuts and also how insolvency rules are going to work out
in India.
Edited excerpts:
What is your thought on what the RBI would do as far as inflation goes in lieu of GST?
Mythili Bhusnurmath: That is very difficult to say but at the moment, we have not seen too
much of disruption because of GST. Whether that is because it is early days is not clear. The
CPI numbers may not show much of an impact on GST because the CPI is predominantly
weighted by food and the prices are not expected to change at all. It is services that are likely to
go up and services inflation will not really show up in the CPI numbers. Given that the CPI
numbers have been pretty soft in the past few months, the CPI numbers per se may not go up.
RBI really will have a very tough call because of economic activity also.
So far, we have not seen too many signs of disruptions but there are some rumblings under the
service. One really does not know of course it is early days it has been less than a week since
we launch GST and the RBI meet is only in August so meanwhile you also have suggestions from other central banks that they are all on a
tightening circle or likely to soon launch a tightening circle with the Fed even talking about shrinking its balance sheet.
It is going to be a very difficult call for the RBI. We will have to wait and see how GST pans out on the inflation front. RBI is not going to get much
help particularly for its neutral stance. It is going to be very tough but being the RBI Governor has always been tough and having an MPC does
not make much of a difference really because ultimately the buck does stop with the RBI Governor. He really is the man who has the casting
Madan, do you share my views on the RBI being in a very tough position really and the MPC does not really make much difference because
ultimately the buck stops with the RBI Governor?
Madan Sabnavis: I would have a very different view because I feel that with the MPC coming in, it is supposed to be based on a consensus. In
case of a serious disagreement and if it is evenly balanced, that is when the RBI really steps in. But the whole concept of deciding that monetary
policy is going to be guided by a single factor. Inflation targeting and the decision about whether inflation is going up or down is likely to go up or
down is going to be decided by the MPC.
That makes things fairly simple. Only in case of a logjam, is there a casting vote for RBI. Today, it is quite difficult for anybody to stand back and
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7/10/2017 Take the 12 big NPA cases as a serious experiment: Madan Sabnavis, Care Ratings - The Economic Times
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say that RBI should be lowering the interest rates and why is it not doing it because the decision has actually been taken by a committee which
has academicians who surprisingly generally have been thinking on similar lines as the RBI so far.
Mythili Bhusnurmath: You are right on that but the problem really is that the MPC really has a single mandate -- price stability and
getting inflation within that 4 plus/minus 2%. But the RBI is a full service central bank. The RBI has responsibility for much more and
that really is the central dilemma. What does the RBI do? How does it marry the two -- an MPC which has a much narrower mandate
with the central bank which has a much larger mandate. To my mind, that is where the confusion arises from. Do you think the three
members from the RBI on the MPC will have to keep those other aspects also in mind? That will cause them to perhaps cast their vote
quite differently from the outside members?
Madan Sabnavis: No not really on account of the mandate being given that monetary policy is going to be formulated by a committee which is
going to target only inflation. RBI does keep talking about forex situation and growth but generally if you look at the way in which monetary policy
is targeting inflation by just looking at CPI numbers and in case it is expected to go up or down, that is how decision is to be taken.
The difference is the way in which one interprets expected inflation. I think that is when we had difference of opinion in the last MPC meeting
where one member probably felt that it is time to lower interest rates though I think the kind of cut which he are suggesting did look a bit high
under any circumstances.
It is a wholesome view that has been taken by the RBI but to my mind what really goes into this particular policy is only the interest rate and that
is where inflation matters. But when you are talking about the concerns of the RBI, it cannot just close the books and say that okay we have taken
a decision not to do anything on interest rates. Let us sit back and not bother about the other things.
Of course, action is going on all the time on the forex front and also in terms of growth and the way in which bank credit should be revived by
resolving the NPA issue. It is definitely a much broader canvas for the RBI or for any kind of central bank. MPC’s mandate is just to look at a
narrower effect of interest rates and since normally it so happens that whenever we talk of a monetary policy, the only question is will interest
rates be lowered or not. In case it is not, then what is going to happen in the next policy?
We tend to just look at this particular single factor of interest rates.
Mythili Bhusnurmath: Absolutely and other aspect of monetary policy which perhaps matters a little bit is that the financial stability
and that is a very crucial aspect of monetary policy. The latest Financial Stability Report (FSR) of the Reserve Bank of India in fact does
not give a very happy picture at all. On the contrary, far from the NPA situation getting resolved, the RBI is FSR says that in fact the
position is going to worsen and the worst case scenario shows it crossing 10% by 2018.
Do you think the way we are attacking the NPA problem is the right way to go about it or have we somehow shot ourselves in the foot in the
process?
Madan Sabnavis: I think it is worth taking this particular chance which the RBI has taken. The very fact that these 12 big cases have been
referred for insolvency, is a very good move because so far we have not really seen any kind of solution coming up and this whole issue of NPAs
has been on for almost a decade. Nobody has really been able to resolve it. We have had these asset reconstruction company, debt recovery
tribunals, S4A all various kinds of schemes but we needed somebody to really say that look we are going to take a decision about what has to be
resolved and how it is going to be resolved.
I am quite sure there are going to be these continuous problems. Essar is probably just one case, there would be more of them which would be
probably feel that this may not be the right way to go about or them being penalised more than the others.
Since the start has to be made, I think rather than doing nothing, what the RBI has done after getting the blessings of the parliament by being
given this kind of power to do so is to move things ahead. While the immediate scenario definitely does not look very much different from what
was it last year, one can think that probably in a couple of year’s time, we would definitely manage to resolve some part of this NPA build up.
Mythili Bhusnurmath: Yes certainly one has to really go after the company and ensure that the company also shares some of the pain
but the code wants to ensure that a lot of “unscrupulous”, promoters do not go to court and stall the entire procedure. But clearly that
has not happened because you cannot really prevent anybody from going to court on some ground whether it is arbitrary rule of law,
natural course of justice etc Does it really mean that unless you really amend the legal system, you are really going to end up in the
same logjam?
Madan Sabnavis: It is very much possible but we should also see that practically speaking we cannot really change the judicial process just for
the sake of the NPAs. The kind of problems which we have because of legacy issues or something which is ingrained, cannot really be changed
even in a another decade or so. Things are going to move slowly. There are going to be these difference of opinions and redressal will be sought
in courts. There are going to be delays but we will just have to wait and see whether out of these 12 cases, which are going to enter this particular
stream whether a certain part of that gets resolved.
I would still say that rather than do nothing or keep waiting for something to happen, these are certain definite steps which have been taken which
should also send a very strong signal to other parties who may be trying to delay on their payments hoping that they could get away with it. Now
you know very clearly that there is a particular system which is in place which could also put you into it in case there are any kind of major
defaults.
Mythili Bhusnurmath: But here my issue really is that NCLT has admitted it you have appointed an insolvency professional, they are
going to try and run companies and come out with answers and they have never run a company before. I know I will be a disaster as an
entrepreneur. So all these insolvency professionals who are perhaps very sound as far as theoretical knowledge is concerned but
these are complex businesses and they are trying to come up with answers. Are we really in some way trying to transplant systems
which have worked in the West and trying to put them in our kind of scenario where business is not easy? Are we being a little naive
when we think an insolvency professional can come up with solutions which bankers, the promoters, the company has not been able
to come up for whatever reason?
Madan Sabnavis: I full agree with you first as an economist that yes we cannot run any business. In fact, if I were ever to be given any kind of a
target or any kind of business target to be achieved, I do not think I will ever be able to do it.But that is on the lighter side. But in terms of
insolvency professionals, that is a very pertinent point. In fact, even the concept of saying that a bank can be running a company may fall flat on
the face because you require a different kind of an entrepreneurship spirit to run a company. I am quite sure that the current kind of people we
have as insolvency professionals will not really be that competent to run these complex cases because we are really talking about companies
which have gotten into deep trouble for various reasons and which have not been revived with the professional management. Now suddenly
asking some outsider to come and do it is definitely going to be a major challenge.
Mythili Bhusnurmath: The ultimate answer seems to be the insolvency court, liquidation, in which case are we in danger of stripping
away assets which have been built with a great deal of difficulty in a capital scarce country? How do we guard against trying to
preserve whatever assets we have created, at the same time not allowing unscrupulous companies to get away with the kind of
defaults that there have been in the past?
Madan Sabnavis: No, I think that is definitely a very genuine concern which we have in terms of what happens to these particular assets in case
we are going for liquidation unless we are able to really sell it off to some other bidder. But again looking at some of the industries which we are
talking about, if I am talking of a power plant where we already have excess capacity, I doubt if anybody would be willing to buy a power plant.
Similarly, it might be difficult to find a buyer for a steel company.
In case, if we just let it go, then there is a case of loss of assets and recreating the same kind of difficulty when economic conditions change and
we require these kind of assets to be built. I would go back to saying that we just have to wait and see how these 12 cases are resolved because
it is a serious experiment which is being made and we are not quite sure what the costs are going to be. On paper, it looks like that they can be
resolved if we go step by step. But by the time we realise that these hurdles are there at every particular step and the last case of liquidation
would also be probably the most serious issue for any of these assets which are being resolved
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