1. Raghuram Rajan tried his level best to reduce inflation by regulating the money flow in the banking system through the rate of interests offered by RBI to the banks, namely repo, base, and reverse repo rates. If today you are getting your home, car, education, and business loans at lower rate of interests, then he is the man behind it, at least to a very large extent.
2. He is a non-partisan thorough professional who does not have any political inclinations. He was appointed by the then UPA government but this was one decision where we won't question the previous government unlike the myriad of scams that it committed since RR was a highly respected personality in the field of finance.
3. He is the man behind the opening of small payment banks in our country through which you can do money transfer from service providers like Airtel, Vodafone, etc. He pioneered these concepts in our country which were already in use in foreign countries since a long time.
Now let's be a little bad and find his shortcomings because after all he is just a mere mortal.
1. Some of the policies of RBI like discarding the old-fashioned (but well meaning and very useful) systems in the banking sector like disposing of confidential bank reports while sanctioning loans and heavy reliance on credit information companies (CICs) for getting the track record of the borrower has done more damage than good. All this was done in the name of "better customer service" in order to avoid nuisance to genuine loan seekers but this has led to unscrupulous elements entering into the credit system of the banking sector since the CICs are no gospels of track record of any person and nothing beats the personal interaction and inspection of human banking official while sanctioning of loans. Moreover, he did a blanket implementation of this scheme unknowing of the fact that in the rural heartland of Bharat, the CICs don't have much penetration and many defaulters are not captured in their database. This is one of the reasons for the high NPA today in our banking system and the subsequent coming of loss of major banks.
2. In the hurry to decrease inflation by decreasing rate of interests, RR introduced a new system of calculating rate of interest with effect from 1st April 2016 called the Marginal Cost of Funds based Lending Rate or the MCLR. (Here is an article explaining the nuances of the same). This system of calculating rate of interest, as per our view, will result in a huge dent in the profitability of the banks since the margins kept by the banks for providing loans are really thin and it becomes really difficult to even cover up operational costs of the banks.
3. The third and last point is that he is not a "field" man and rather a "board room" man. We do agree that he is a knowledgeable man (who is even rumored to be the next Noble prize winner for Economics in the near future), but in order to control the Bharatiya banking industry what is required is the ground level knowledge, the "nukkad ki baat" kind of acumen in dealing with credit decisions, and even bigger decisions. A small error that he committed was to equate our semi-baked urban economy to the developed urban economies of the west without considering the fact that nearly 60% of our economy comes from the semi-urban and rural areas. Just forcing banks to open branches in such areas will not help unless background changes in recovery laws (of course, it is not fully in his hands) is brought forth and banking policies aligned with the local economies. A small example is the scale of finance based financing of agriculture sector which has led to over-financing for some farmers and gross under-financing for some. Not to mention, the tonnes of restructured agriculture and business loans are going to be dead bodies in the cup-board which will be falling off the shelf anytime soon.
So our take - if at all you retain RR, tell him take a Bharat bhraman and understand our local culture and economy for framing new policies and tell RR to make his junior officers also do the same. It won't hurt if RBI officials are also given a mandatory rural/semi-urban assignments for understanding our country in a better fashion. And in case you terminate his services, make sure you find another man with a heart of gold like him.
Happy Ethmos to All!
