Bank NPAs, inflation stare at Patel

There has been a widespread commendation of the appointment of Urjit Patel as the next governor of the Reserve Bank of India (RBI) to replace Raghuram Rajan who had begun his eventful innings in September  2013 as a ‘rock star’ but left his mark on the Mint Street as a clear-headed central banker who knew how to fix the rot in the Indian banking system. Patel who worked under Rajan as one of the four deputy governors is credited with inflation targeting, one of the most outstanding achievements of the RBI despite pressure from within the government and the industry to instead give preference to lowering of the interest rates. The entire concept of inflation targeting was the outcome of a key RBI panel, known as the Urjit Patel Committee. The obvious expectation is that the new RBI governor would continue with a monetary policy that would deal with the inflation as seriously as was done during Rajan’s tenure. So his image as an ‘inflation wage warrior’ stays, though the industry is expected to further mount pressure to reverse the stance.

Though Patel has a rich experience of working with the International Monetary Fund and has an enviable academic record from Yale University and Oxford, his stint as deputy governor should help him tackle the monster of a problem of the size of $119 billion in the form of non-performing assets, resulting from economic downturn, callous loan sanctions by the public sector banks and capitalists who were more of cronies of some corrupt politicians than honest business men and women. Despite an unrelentless pressure mounted by Governor Rajan on banks to clean up their balance sheets and come clean, the problem is far from over and would continue to remain a big challenge for the new incumbent.

Another task cut out for Patel would be to ensure that the liberalisation embarked upon by the outgoing governor is carried on without any dilution. The licensing on tap, allowing payment banks and mobile banking in a big way is going to redefine the way people do banking. Many call it the next biggest disruptor for the Indian business. Besides, a constant vigil would be required to ensure stability in the foreign exchange market where rupee is staying steady. While there is no immediate problem despite continuous drop in exports, the liquidity-driven rally in the stock market may take an unexpected turn on any global event. Subramanian Swamy may not like but the Rajan legacy would be visible and some of the key policies of the past three years would be irreversible.