Here is an omnibus on financial sector reforms that takes us through the entire process of reforms in the past three decades. Written with the finesse of an economist and expressed with the panache of a journalist, the views are frank. However, a balanced approach is taken, with extensive references and quotes by those involved in the reforms process over the years. More importantly, it hits hard.
The idea that reforms have largely been driven by the political economy after 1991 plays out through the book. In 1991, we probably did not have an option, but since then we have been vulnerable to such compulsions. The author interestingly points out that there are five stakeholders who exercise uneven power in this process of financial reforms. These are the government, financial institutions, regulators, industrial consumers and the retail segment. He refers to the financial system as one of ‘campaign finance’ where the industrial consumers with disproportionate bargaining power distort the matrix by wielding significant clout in every possible way. This is in contrast to the retail customers who hardly have any power. But once there is a crisis that can be in the banking system or capital markets, there is a major problem posed to the administration. This, in turn, leads to rapid reforms, after which it slides back to a cozy static equilibrium. Hence, the response has tended to be more reactive.
He rightly points out that the reforms that happened in 1991 were wrapped around macroeconomic adjustment and fiscal stabilisation but did not move the needle in the public sector (read government), leaving the patronage network untouched. That’s why there is constant hesitancy in bringing about reforms, which continues even after 2014 (there is a chapter on this aspect).
Four things stand out here. First is the resolution process of NPAs where Singhal is quite blunt in saying that all measures taken so far have yielded sub-optimal results because of poor design and implementation. Any new regulatory scheme that is launched with fanfare gets finessed by Indian corporates. One cannot argue with the author here as he is spot on. Second, he points out that the incentive structures in banks and NBFCs are so designed to encourage higher lending and excess risk taking. Further, as there are no incentives for early disclosures and resolution when things go awry, the repercussions are deep. Third, there is a lot of regulatory arbitrage in the system as only banks and NBFCs are subject to RBI’s regulation, while players like mutual funds, PE funds, etc, reside outside the purview of regulation. There is a need for alignment across regulators. Last, shortages in funding have forced financial players to pivot to foreign capital where PE funds invest in unlisted companies and are routed through funds in tax shelters.
The book is a breeze as Singhal takes us through different segments of the market in various chapters. The chapters make sense individually too, and hence can be read in any order. The chapter on equity markets takes us through the early days when BSE was the only exchange, to the setting up of SEBI, which became a formal regulator post reforms. The pages on the infamous scams in the market is pure déjà vu as those who lived through those years can now see the difference in not just the market but also the regulatory set-up. The stories behind the Harshad Mehta and Ketan Parikh scams are described in some detail. However, he does point out that financial scams were not really new and India has a history of such impropriety, such as the stories of Nagarwala, Mundhra, etc.
When it comes to reforms, the author points out that it can never be clear as to what is the best way out. Post 1991, there were always two views—one where critics felt that they were too gradual and should be faster. The other view is at the other end, where the policy makers felt that anything faster would lead to difficulties in absorption by the players creating disruptions. There is clearly no answer here. But often the policies or reforms turn out to be reactive as they respond to a crisis, meaning thereby that the regulator had not really thought of the same earlier. This is where there is scope for being more nimble.
The author also treads on the delicate territory of the conflicts between the government and the RBI, which are quite historical and not new. Often the government may have other motivations, as seen from the case of abandoning the ad hoc treasury bills to finance the deficit. The RBI had to fight hard to ensure that budgets were financed by borrowings in the market and the ways and means advances were used only for temporary liquidity relief. The author shows that things may not have changed significantly even today.
There is a separate chapter titled ‘Indian reforms: Event-driven, even after 2014’. Hence, longstanding reforms on privatisation of public sector banks have been held up despite several reports recommending it. This period had its share of spats between the RBI and the government, leading to the resignation of a governor. Further, demonetisation affected smaller enterprises, leading to high growth in NPAs. This was also the period of busts with IL&FS, DHFL, Yes Bank and PMC Bank. He raises some pertinent questions here on the Yes Bank issue. Was the RBI stopped from acting by politically powerful interests or was the regulator slow in reacting only when the bank had reached the edge?
The book keeps the reader engaged all through with easily understood examples to demystify some concepts. The title of ‘slip, stich and stumble’ just about summarises the author’s view of how financial reforms have evolved—we fall, stich but stumble again. Can there be a better way out from this pattern? The reader can decide on this one. This book is truly a pleasure and should be on the bookshelf.
Book: Slip, Stitch & Stumble: The Untold Story of India’s Financial Sector Reforms
Author: Rajrishi Singhal
Publisher: Penguin Random House
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