Why Urjit Patel Resigned as RBI Governor

Patel is the first governor since 1990 to step down before his term ends.

File image of Urjit Patel.

(Photo: Reuters)

Reserve Bank of India Governor Urjit Patel has resigned from his post, making him the first governor since 1990 to step down before his term ends. Patel’s three-year term was to end in September 2019.

“On account of personal reasons, I have decided to step down from my current position effective immediately. It has been my privilege and honour to serve in the Reserve Bank of India in various capacities over the years. The support and hard work of RBI staff, officers and management has been the proximate driver of the Bank’s considerable accomplishments in recent years. I take this opportunity to express gratitude to my colleagues and Directors of the RBI Central Board, and wish them all the best for the future.”

Speculation of Patel’s exit had picked up after differences between the RBI and the government spilled out in the open. This first happened when RBI Deputy Governor Viral Acharya delivered a hard-hitting speech on the need to ensure the independence of the central bank. The speech was delivered with the backing of Patel, suggested the footnotes in Acharya’s speech.

The provocation of that speech, BloombergQuint reported, were letter sent by the government seeking consultations under a rare provision of the RBI Act.

The provisions, laid down under Section 7 of the Act, allow the government to give directions to the central banks considered necessary in public interest in consultations with the governor.

What Prompted This?

There have been a number of contentious issues that have cropped up between the RBI and the government.

Prime among them is the government’s demand that the RBI shell out more dividend from its reserves. Suggestions to either increase the dividend or reduce the capital on the central bank’s balance sheet have met with opposition from current and former RBI officials.

Citing research from various academics and writings from former RBI Deputy Governor Rakesh Mohan, Acharya noted that having adequate reserves and capital is important for maintaining confidence in the central bank.

“Having adequate reserves to bear any losses that arise from central bank operations and having appropriate rules to allocate profits (including rules that govern the accumulation of capital and reserves) is considered an important part of central bank’s independence from the government,” Acharya said in his speech.

Also, earlier this month, government officials on the RBI’s board pushed for a relaxation of the prompt corrective action framework being used to nurse weak banks back to health.

This, despite the fact, the RBI has repeatedly explained the need for such a framework. Eleven government banks are under the framework.

The pressure from the government to ease the framework prompted Acharya to reiterate the need for greater RBI control over government-owned banks —a point highlighted by Governor Patel earlier this year.

Another point of contention between the RBI and the government has been the a suggestion to set up a payments regulator outside the purview of the RBI. Recently, the RBI publicly disclosed its dissent note on the government’s proposal to set up a Payments Regulatory Board.

Timeline Of Events Leading to Urjit Patel’s Resignation

• 8 Aug 2018: Government appoints die-hard Sangh ideologue S Gurumurthy, and cooperative banker and Swadeshi supporter Satish Marathe to the RBI’s central board as independent directors.
  
• Mid-Sep: Government cuts short the term of RBI central board member and noted banker Nachiket Mor, who is also associated with the Bill & Melinda Gates Foundation.
  
• 10 Oct: Government invokes the never-before-used Section 7 of the RBI Act to force down decisions it wants RBI to take through three letters with over a dozen demands. RBI replies to these letters a week later.
  
• 23 Oct: RBI holds a marathon board meet that lasts for around eight hours but remains inconclusive on most issues that government brought in.
  
• 26 Oct: Deputy Governor Viral Acharya goes public to assert RBI’s autonomy, warns of the wrath of the markets if it is not maintained through a speech.
  
• 29 Oct: Another Deputy Governor NS Vishwanathan delivers a speech in Jamshedpur, making clear RBI’s reluctance to bring down capital levels for banks.
  
• 31 Oct: Government reiterates need for RBI autonomy as “essential” but calls for better governance at RBI.
  
• 3 Nov: Economic Affairs Secretary SC Garg cites improvements in market indices, the rupee and crude to make light of Acharya’s “wrath of markets” remarks.
  
• 9 Nov: Garg says discussions are on to fix an ‘appropriate economic capital framework for RBI’ and says the government does not want the RBI money.
  
• 15 Nov: RSS ideologue and central board member S Gurumurthy says standoff between RBI and government not a “happy thing”.
  
• 17 Nov: Ahead of RBI board meeting, Finance Minister Arun Jaitley says growth should not be throttled by squeezing liquidity to the needy sectors.
  
• 19 Nov: A 10-hour RBI central board meeting decides to set up a panel on the economic capital framework for RBI and directs it give forbearances to small businesses.
  
• 5 Dec: Governor Urjit Patel refuses to answer queries on frictions between RBI and government, amid reports of truce between the two.
  
• 10 Dec: Patel resigns, citing personal reasons.
  

A Governor Wronged?

Patel’s relationship with the government got off a rocky start. Just two months into his tenure, the government announced demonetisation, which led to the withdrawal of 86 percent of the country’s currency in circulation.

The decision had been opposed by Patel’s predecessor Raghuram Rajan.

Patel remained silent through much of the process of demonetisation and remonetisation. However, BloombergQuint had reported in November 2017 that the RBI would have preferred it if the government had deferred its decision until it had a larger stock of new currency notes printed. Recently, The Indian Express reported that the RBI had made “significant observation” on some of the justifications given by the government for its demonetisation decision.

As the demonetisation experiment passed, the reticent Patel turned his focus to banks and took a tough stance with both public and private banks. This has led to increased run-ins with the government.

Eleven weak public sector banks have been put under the RBI’s prompt corrective action, restricting them from expanding till they clean-up their balance sheets. While the government had earlier supported the framework, it has since changed its view and has been calling for a relaxation of the framework.

A 12 February circular, which asked banks to begin resolution of stressed accounts a day after they delayed payment, has also led to a public battle between the government and the RBI in court.

Patel’s objective, though, was to clean-up banking, both private and public. He has been equally tough on private banks that were seen to be lax in meeting governance and compliance standards set by the RBI. Two private bank chief executives – Shikha Sharma and Rana Kapoor - have been denied a term extension. A third – Chanda Kochhar – has stepped down due to allegations of impropriety. It is not clear whether the RBI had a role in her removal.

Patel’s exit means the central bank has now seen two quick transitions. His predecessor Raghuram Rajan left at the end of his three year term but had indicated his decision to leave even before the government could come to a final decision. Patel exits with a few months to spare in his current three-year term. Former governors D Subbarao and YV Reddy both spent five years each at the helm of the central bank.

(This article was first published on BloombergQuint)