Gurumurthy backs govt stand on credit liberalisation

Gurumurthy, a known supporter of the ruling Bharatiya Janata Party, on Thursday said the Reserve Bank of India has a massive surplus of Rs9.6 lakh crore, which, according to him, is the highest for any central bank world over.

He also backed the government’s position of seeking easier banking rules to ensure credit flow to the economy, saying that the revised prompt corrective action norms that were introduced in 2017, are too harsh on banks.

The revised prompt corrective action norms included new set of triggers to invoke corrective action in weak banks like net bad loans crossing 6 per cent. The government, however, feels the RBI should be more liberal and follow practices of other central banks and move away from asset-quality based triggers for intervention.

Gurumurthy, who was appointed to the board of RBI a few months back, said the capital adequacy ratio prescribed in India is 1 per cent higher than the global Basel norms. He also pitched for easing lending norms for small and medium enterprises, which account for 50 per cent of the country's GDP.

In his first public comments since the spat between the RBI and the finance ministry over a range of issues came out in the open, Gurumurthy said the stand-off "is not a happy thing at all".

The RBI's board meeting is scheduled to take place on Monday where the issues raised by the government, including easing of PCA norms, cutting size of reserves and enhancing credit to MSMEs, are likely to come up for discussion.

Gurumurthy also praised the government’s overnight demonetisation of Rs500 and Rs1,000 notes in November 2016, and said the Indian economy would have collapsed but for the cleansing act.

He pointed out that ahead of the demonetisation move high denomination currency notes in circulation had risen to Rs4.8 lakh crore in just 18 months and was being funnelled to real estate and gold.

On the capital framework for RBI, he said studies have put the adequate size of reserve that the central bank must maintain to guard against default risk at 12 per cent and 18.76 per cent, respectively. Against this, he said, the RBI currently has reserve of 27-28 per cent, adding that the falling rupee value might have pushed up the RBI’s reserve levels further.

"The appreciation in the value of the dollar is the reserve of the Reserve Bank. You bought dollar at 42-45, and it is now 70. Just like when you buy some shares and the share values go up, and you take the appreciation as your reserve, this is the reserve.

"You cannot say, come on it has appreciated so much, give me that money. I don't think the government is asking for that. As my understanding goes, the government is only asking for a formulation of a policy as to how much reserve the central bank must have. Most central banks don't have reserves of this kind at all, only RBI has these kinds of reserves," he said.

Gurumurthy was delivering a lecture on 'State of the Economy: India and the World' at the Vivekananda International Foundation (VIF) in New Delhi on Thursday.

Stating that the stand-off between the RBI and government "is not a happy thing at all", he indicated that differences could be a result of considering only the American system as the perfect ecosystem.

"But I think an alternative is necessary and exists also. That is part of an overall correction of the Indian mind," he said.