Replug: The Curious Case of Urjit Patel

EVER SINCE HE TOOK charge in September 2016 as Governor of the Reserve Bank of India, the reclusive Urjit Ravindra Patel’s regular visits to a food joint behind the central bank’s building on Mint Street in Mumbai to relish a serving of dabeli, a Kutchi snack, may well have been the only time he could be described as ‘accessible’. On occasion, he also drops by the Cricket Club of India with his mother. He does not have many friends in the city. If this created perceptions of him being a loner, the 55-year-old Patel’s reluctance to meet and consult his own colleagues in the bank, leave alone interact with Finance Ministry officials, has only strengthened the image of a man who keeps to himself. Having taken over from Raghuram Rajan, a governor with ‘rock star’ appeal, as it were, the contrast could not have been sharper.

The RBI Governor, many in India’s banking and finance sector believe, is currently the fulcrum of an ongoing standoff between the central bank and the Government. In his stint as governor, Patel has been “singularly uncommunicative and totally inaccessible”, in the words of a banking sector expert. Traditionally, RBI governors have been in constant touch with not just their deputies and chief general managers, but keep a close pulse of all financial markets. Since containing volatility in some of these is part of the RBI chief’s role, it’s not uncommon for the incumbent to discuss such issues with bankers and market leaders. With Patel, though, even deputy governors have had to seek appointments, says the expert. “Under Patel, markets have been left mostly in the dark,” he says.

Market players attribute the friction between the RBI and the Finance Ministry to the recalcitrance of Patel, who appears keen to be seen as a defiant, independent-minded governor of high credibility by resisting the Government’s call for increased transparency on the central bank’s reserves (just how much is necessary for stability operations) and for enhanced liquidity so that credit can be eased to money-strapped sectors. Should the Government invoke its special power under the law to get its way, some observers expect Patel to play Sir Galahad in defence of the RBI’s autonomy.

During the last six months of Raghuram Rajan’s stint as Governor, by when he had lost the Government’s favour, Patel reportedly made sure word of his frayed relations with Rajan reached Delhi

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The fact that Patel has not yielded to advice that he should ‘pull back from a showdown’ and engage the Government on its position on liquidity instead of resorting to such a confrontation throws up some questions. How did matters come to this pass? And how did a man who allegedly lobbied to insinuate himself as the Modi Government’s choice to replace Rajan in 2016 turn against it?

Armed with degrees from London School of Economics, Oxford and Yale University, Patel has apparently had an eye on the RBI’s top post since the early days of his career as an economist. Until 2013, he was a Kenyan by nationality. Hailing from a business family based in Nairobi, Patel had to become an Indian citizen before he could be appointed to a senior position in the bank. It was just a few days before his induction as RBI deputy governor that he got an Indian passport under the erstwhile UPA Government.

In the early 1990s, Patel had served as deputy to the IMF’s country head for India, Charles Collyns, when Manmohan Singh was India’s Finance Minister and Montek Singh Ahluwalia the finance secretary. As an IMF representative in India at a time when the country was implementing its ‘structural adjustment’ conditions for a loan from the global institution, Patel had direct access to power in Delhi. Rather than Collyns, it was mostly Patel who interacted with the then power duo of Singh-Ahluwalia. He later grew close to Vijay Kelkar, who would serve as finance secretary in the Vajpayee era. The IMF’s main domestic office was located in a Jor Bagh bungalow, and Patel had his residence in the same building. It was around this time that Patel married a lady from an influential family (the couple got divorced some years ago).

Regulators ultimately decide the rules of the game and regulators have to have a third-eye, which is to be perpetually open. But unfortunately in the Indian system, we politicians are accountable, the regulators are not, says Arun Jaitley, finance minister

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After a short mid-90s stint in Washington DC, Patel was sent on deputation by the IMF to the RBI in an advisory role, and he would soon be a consultant on various government panels. He was consultant to the Ministry of Finance, for example, between 1998 and 2001 under the Vajpayee Government, and was on Central committees and taskforces to examine issues as wide-ranging as direct taxes, infrastructure, telecom, civil aviation and even pension schemes well into the 2000s. Along the way, he even worked shortly in the private sector as president of business development at Reliance Industries. By all accounts, Patel was widely networked.

Patel’s breakthrough with Narendra Modi came during his stint as non-executive director of Gujarat State Petroleum Corporation, when he befriended the BJP Chief Minister of the state at the time. Patel penned an IDFC report on electrification for Modi.

AS RBI CHIEF, PATEL came to be seen as a harsh boss. Soon after he took charge, he had convened a meeting of economists, and when reports on it appeared in a business daily under the name of a reporter whose surname matched that of a chief economist of a public sector bank, he barred the latter from attending future meetings.

While he was made deputy governor under UPA rule, once inside the RBI, insiders say he would insert himself in disagreements between former Governor Rajan and the Finance Ministry even under the NDA. Reportedly, during Rajan’s final six months at the bank, there was almost no communication between him and Rajan, and he made sure that word of his frayed relations with the Governor of the day—who had lost the Modi Government’s favour by then—reached important ears in Delhi’s circles of power.

Once Patel replaced Rajan, he employed Viral Acharya, an academic from New York University’s Stern School of Business, as an RBI deputy governor. In 2017, Patel reallocated work portfolios. Apart from the crucial monetary policy department, Acharya was now to look after economic policy and research, corporate strategy and also the budget and financial market operations—virtually everything that counted. The senior- most deputy governor R Gandhi, who was looking after most of these, was left with little.

Relations began to go southward between Patel and the Government on a number of issues. By the latter half of 2018, warning signals of a showdown between Mint Street and Delhi were clear. The issue became public when Acharya delivered his AD Shroff Memorial lecture on October 26th with its ‘Apre moi, le deluge’ tone warning of a negative market response to possible negative effects of curbs placed on a central bank’s authority, and Board member S Gurumurthy complained about it. The speech referred to the “short term outlook” of all governments and the importance of allowing the central bank complete ‘independence’ in functioning in what Acharya called the interest of a stable economy. Undermining the RBI’s freedom would be a “self goal” by the Government and “potentially catastrophic”, in his provocative words.

Deputy Governor Viral Acharya would persistently argue Patel’s case when the Government began seeking transparency on RBI reserves and asking for a rethink on the relationship between the Centre and the central bank

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Reports soon came that the Government could invoke Section 7 of the RBI Act, which has never been used since the RBI’s formation, in order to give it instructions ‘in consultation with the Governor’. The very suggestion of this was seen as Delhi throwing down the gauntlet before an uncooperative governor. Should the option be exercised, reports said Patel would resign in protest.

It was Acharya who persistently argued Patel’s case even as the Government began seeking clarity on RBI reserves and asking for a rethink on the Centre-bank relationship at a time when India was poised to be world player in an increasingly complex global economy. It was Acharya who hit out at bankers who complained about the RBI.

“When past governors like YV Reddy and Bimal Jalan had differences with the Government, they resolved it behind closed doors so as not to weaken or jeopardise the institution. Patel doesn’t want to go down in RBI history as a perceived rubber stamp. He wants to be known as someone who has revolted against the Government and taken a stand, not as someone who has failed,” says a Finance Ministry official.

This was the same man who, when he was in the IMF, supported a downgrade of India’s ratings. This was the same man who got an Indian passport within a day.

THE RBI’S FAILURE to manage the urgent needs of financial markets and its failure to address a liquidity crunch are at the crux of the recent troubles. Earlier, after the Punjab National Bank scam involving Nirav Modi, Finance Minister Arun Jaitley, pointing to the RBI’s poor bank supervision, had said, “Regulators have a very important function. Regulators ultimately decide the rules of the game and regulators have to have a third-eye, which is to be perpetually open. But unfortunately in the Indian system, we politicians are accountable, the regulators are not.”

Patel retaliated by pointing to constraints on the RBI’s power to supervise and regulate public sector banks (PSBs): “It cannot remove PSB directors or management, who are appointed by the Government of India, nor can it force a merger or trigger the liquidation of a PSB; RBI has also limited legal authority to hold PSB boards accountable regarding strategic direction, risk profiles, assessment of management and compensation. Legal reforms are thus highly desirable to empower RBI to fully exercise the same responsibilities for PSBs.” Patel also complained of the ‘moral hazard’ of pre-election loan waivers by governments.

Again, post the crisis at IL&FS, an infrastructure lender that was unable to meet its financial commitments, the Finance Ministry wanted relief for all those non- banking finance corporations (NBFCs) that faced an acute problem of payments. The RBI, however, refused help despite the Government seeking to impress upon the Governor that such an action was needed and that given the economic backdrop, the central bank had to work with Delhi and not chart a course at odds with the Executive’s goals. The arguments, though, appear to have made little impression on the Governor, even as the RBI Board is set to meet on November 19th and discuss these matters.

On reserve transparency and liquidity, Patel has so far refused to admit that the RBI may have misread the situation in the context of an economy faced with new global realities. Instead, Acharya spoke of an “assault” on the “autonomy” of the institution, words of resistance often used by those in charge of organisations. Rajan had done it too when the Government divested him of the power to select deputy governors. He had tried to get a seat for Nachiket Mor, a friend from his IIM-A days, on the RBI’s central board. Rajan tried to appoint him chief operating officer at the RBI, a post of the same level specifically created for the purpose, but had to drop it when its deputy governors objected. As per the law, the RBI can have only four deputy governors. What followed was a hard-hitting speech at Goa in 2015 in which Rajan said, “Strong governments may not always move in the right direction.” Patel seems to have borrowed Rajan’s script to unleash his right-hand man Acharya to attack the Government.

Adding their voice were overseas economists like Vivek Dehejia, a senior fellow at the IDFC Institute where Urjit Patel had spent a few years. Dehejia may have his own axe to grind with the Modi regime, which failed to reward him with a suitable assignment in North Block.

Acharya’s October 26th broadside against Delhi came soon after a meeting of the RBI Board raised three issues: extra liquidity measures by the central bank in the aftermath of the IL&FS fiasco, which had virtually stopped credit flow in an important sector of the economy; the relaxing of lending restrictions on 11 banks placed under the Prompt Corrective Action (PCA) framework for having large unpaid loans on their books; and the offering of a lifeline to small and medium-sized businesses bruised by sluggish growth. Media reports suggested that the Government was looking to instruct the RBI to loosen the purse strings of its reserves.

Starved of liquidity, lenders had borrowed over Rs 1.3 lakh crore at that point from the RBI using its short-term credit facilities, and pre-Diwali demand for cash only worsened things, according to the Government. The situation was expected to ease somewhat with RBI announcing it would buy government bonds from banks worth Rs 40,000 crore in November, which would infuse them with cash.

But the Governor still appears convinced that there is sufficient money to go around, based on a different tool of measurement. Regardless of shortages, the RBI often considers liquidity levels to be normal as long as the market’s ‘call money rate’—the interest that banks pay each other for overnight borrowings— stays within a certain range. But there are other indicators that market players track. Citibank’s ‘Financial Condition index’, which captures data on bond yields and interest-rate gaps (or ‘spreads’) between various debt instruments in addition to overall liquidity, for example, has also dipped—showing that the system is under stress.

Tension between the RBI and Government heightened when Board member S Gurumurthy said that RBI’s ‘autonomy’ was that of its Board and not its staff

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IN THE LIMELIGHT for highlighting tensions in India’s economic governance today is Gurumurthy, who recently joined the RBI’s Board and has been associated with the BJP’s mentor, the RSS, to which the Prime Minister also owes allegiance. Both Gurumurthy and Sahakar Bharati’s Satish Marathe had disapproved of the RBI’s role in the operations of the Pradhan Mantri Mudra Yojana, designed to extend bite-sized loans to micro businesses. The RBI Board subsequently dumped Mor without prior notice to the Governor, two years before his second term ended, and replaced him with Sachin Chaturvedi, who was in charge of the Ministry of External Affairs’ think-tank Research and Information System (RIS). While he was at the RBI, Mor led the Bill and Melinda Gates Foundation in India, which received funds from overseas, even though the RBI is the country’s foreign exchange regulator. This was a case of conflict of interest, something the RSS was strictly opposed to.

In addition, Mor’s opposition to the Government’s demand for higher dividends paid to it by the RBI was a sore point, and his ouster should have been an early warning to the Governor that Delhi was losing patience with him. The tension hit a new peak, of course, with Gurumurthy’s objection to Acharya’s lecture. The next day, the newly-appointed Board member stated that ‘autonomy’ in the context of the RBI was that of its Board and not its staff.

The discord can be traced back to the Government’s demand for interest rate cuts in the early part of Patel’s tenure, something the Governor refused to acquiesce to. The Finance Ministry maintained that his adamant stand had kept small businesses from getting credit and pushed them further into the red. It also gave job creation a setback. Over the past few months, the RBI is understood to have held back the financial plan finalisation of many key government projects, including nearly 60 of the Ministry of Road Transport and Highways and prevented almost Rs 28,000 crore from reaching solar power projects. Had it facilitated these, it would have helped boost investment in the economy at time of need. Patel’s actions have also not helped resolve vexed issues related to thermal power projects under stress.

The regulator of banks is reported to have denied help to many ministries, even the PMO, on occasion, ignoring notes requesting positive intervention. This has had a series of negative effects on a range of businesses. On its part, the Government is seen to have retaliated by refusing to okay what the RBI wants for the corporate governance of PSBs.

Relieving assets put under stress by policy and regulatory hurdles is understood to be a joint responsibility of both the regulator and the Government. But the bank regulator has abdicated this role. It refused to attend a high-level panel meeting in late August headed by Cabinet Secretary PK Sinha to address the issue of restructuring 30 stressed thermal power assets, for example. This panel was set up on the direction of the Allahabad High Court. Union Power Minister RK Singh and his officials were trying to resolve the problem of stressed assets in the power sector. Promoters of these companies had to approach the Supreme Court for relief while the RBI continued to blame the Government’s decisions for the trauma.

“The world over, central banks work in tandem with governments for the good of the economy,” says a senior government official, “Why should it be different here?”

Urjit Patel may have unfurled a banner of revolt against the Government, moving as far back as February to issue a non-negotiable order on how loans were to be classified as ‘non-performing’, mainly to carve a niche for himself in RBI history, but the Governor needs to remember that while the central bank has autonomy in the three areas of regulating the banking sector, managing the Government’s debt and ensuring low and stable inflation, it is still part of the country’s apparatus of governance and has to mandatorily work with fiscal policy-makers in the Finance Ministry. To boost investment and investor confidence in India, it is not confrontation but cooperation that should be his way to earn a place in RBI history.

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PR Ramesh