November 29, 2018 @ 11:45 am

29 NOVEMBER 2018

Central bank recap

Urjit Patel provides reassuring signals on NPAs and the RBI-Centre détente

There are two important takeaways from the deposition of Reserve Bank of India Governor Urjit Patel before the Parliamentary Standing Committee on Finance on Tuesday. First, the banking industry is over the hump on non-performing assets (NPAs), which peaked in the quarter ending March 2018 at 11.18% of advances. Both gross and net NPAs have registered a decline for two consecutive quarters — June and September 2018. Crucially, there has been a sharp fall in slippages (fresh NPAs added to the existing heap) from 7.3% in March 2018 to 3.87% in September. This is certainly good news as it indicates that the skeletons are mostly out of the cupboard now. Of course, there is still the onerous task of resolving the bad loans stock, which is at a little over Rs. 10 lakh crore now. Profitability of banks will continue to remain under stress as they provide for the bad loans in their books and/or take hair-cuts on recoveries through the insolvency process. Meanwhile, banks will also have to be wary of their small loans portfolio, especially those made under the Pradhan Mantri Mudra Yojana, which already add up to Rs. 6.77 lakh crore. These will need close monitoring.

The second important aspect of Mr. Patel’s deposition was his spirited defence of the RBI’s autonomy. Though he was careful not to say anything that would break the détente forged by the Centre and the central bank at its last board meeting on November 19, he made three forceful points: that the RBI’s autonomy is important to protect depositors’ interests; monetary policy has to be the exclusive domain of the RBI; and its reserves are central to maintaining its AAA rating. These statements are probably aimed at nipping in the bud any attempts to change the governance structure of the central bank. After the last board meeting, there have been reports that the Centre is planning to push for board committees to be set up to “assist” the RBI in the discharge of its work. Monetary policy is anyway the preserve of the Monetary Policy Committee created two years ago under the RBI Act, but there are other equally important functions which the Centre may be attempting to control through the board. The issue of autonomy is clearly the gorilla in the room and driving it out is not going to be an easy task. Yet, for the Centre and the RBI there is no alternative but to continue talking on this subject even while ensuring that it does not cast a shadow over their other respective roles and responsibilities. The issue of RBI autonomy is not something that first emerged during this government’s tenure, nor is it likely to be solved in its remaining tenure.

Dire strait

Russia must be persuaded to lower tensions with Ukraine

Russia’s capture of three Ukrainian naval ships and over 20 crew members in the disputed Azov Sea has refocussed international attention on the conflict on Europe’s eastern corridors. The rapid escalation in tensions following the flare-up is evident. Kiev has declared martial law and demanded that the sailors be treated as prisoners of war. A court in Russian-annexed Crimea, meanwhile, has ordered many of them to be held in pre-trial detention, charging them with illegally entering its territorial waters. Ukraine insists that the patrol of the Kerch Strait, where the vessels were impounded, was authorised under a bilateral agreement with Moscow. A new bridge over the strait that connects mainland Russia with Crimea has raised concerns about Moscow’s greater control and influence in the region. The latest incident coincides with the anniversary of the November 2013 Maidan Square protests in Ukraine demanding integration with Europe, which was the prelude to Russia’s invasion of Ukraine’s Crimea in 2014. The protracted conflict has so far claimed about 10,000 lives and displaced millions, and no lasting resolution is in sight. The 2014-15 Minsk peace accords prohibited air strikes and heavy artillery firing. But the dispute has dragged on into a smouldering low-intensity combat. The Ukraine-Russia conflict has also widened religious schisms. The independence granted to the Ukrainian Orthodox Church from the Russian entity in October was criticised by Moscow. In turn, the election this month of the legislatures of two breakaway enclaves of Kiev, with Moscow’s endorsement, drew criticism from Ukraine, leading European powers and the U.S. as violations of the Minsk accords.

There has been renewed Western diplomatic pressure since the weekend’s skirmishes, with the UN Security Council and NATO calling on Moscow and Kiev to de-escalate tensions. But besides forcing Russian President Vladimir Putin to toughen his rhetoric vis-à-vis the big powers, the hardships from the economic sanctions since Crimea’s occupation have achieved little by way of confidence-building in the region. European powers are divided between those advocating greater diplomatic engagement with the Kremlin and others wanting to press with further sanctions to punish perceived Russian political interference. But there has been little appreciation of the provocation for Moscow from NATO’s continued expansion into the former Eastern Europe and the erstwhile USSR. The geopolitical imperative of greater engagement with Moscow has never been more urgent, as hawks in the U.S. administration make no secret of their preference for confrontation over dialogue. The recent escalations could serve well the leaders of both Russia and Ukraine to divert attention from the sagging popularity levels at home. Ukrainian President Petro Poroshenko faces a general election next year, which, it is widely forecast, he will lose. But the humanitarian situation arising from the continuing conflict brooks no delay in arriving at a speedy resolution.

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