‘Guv only sets direction... Individuals come and go, but institution remains’

He is not India’s No 1 banker for nothing. We were told to present ourselves at 3:30 PM on Tuesday, and RBI governor Raghuram Rajan walked in on the dot, a bit tired from a lengthy meeting with researchers. But the central banker soon warmed up, showing a stern side sometimes and a humane version on occasion. Excerpts.

Is there scope for more transmission of policy rates?

There is more room. When I last looked, about 65 basis points (bps) out of 150 was transmitted into the base rate. They have a point there that if the repo rate is 6.5% and base rate is 9.5%, there is room of 300 bps. So this suggests there could be more room. The 150 bps have been fully transmitted by the money markets, commercial paper (CP) markets, etc. So eventually in the short end, banks will have to transmit a lot. If demand for credit picks up and deposit growth rises, it will create conditions for banks to pass more. As growth picks up, people will want to borrow at the existing rate, and as deposits pick up, banks will want some outlet. We are looking at how banks compute MCLR (marginal cost based lending rates), and whether they are following the spirit of the guidelines. It offers a customer the transition facility, but given the contracts banks have signed with existing customers (on base rates), we cannot certainly tell them to tear that up that and move borrowers to MCLR. We must allow that transition to happen.

You recently said a lot has been done and a lot is left to do.

At one level we are still a $1,500 per capita economy. To go all the way from $1,500 to $50,000, that’s a lot of things to do. In the short run, our path toward inflation and cleaning banks’ balance sheets would be two issues. The long-term issues would be financial inclusion, the last mile, payments banks, and making sure all those things work. One of the reasons we have been hesitant to liberalise on the market side is that we did not want external-induced volatility. As the world normalises, we would be in a position to liberalise more. Also, as growth picks up in the economy and investor faith increases, we will not be worried about adverse shocks and liberalise faster.

The comment was seen as an indication that you were keen on a second term.

I think people pick out something, hang it and over-interpret. That statement was made in terms of what is left to be done. There is a fair amount left to be done at any point. We are still a relatively poor economy, and if we want to wipe the tear from every eye, one would at least want to be middle income — $6,000 to 7,000. If you grow at 8%, then every nine years you double. We need to be four times our (current) income, if we want to be at the middle-income level. That’s two decades worth of work still to be done.

This is the first time that the RBI has been associated so strongly with an individual.

First, I think perceptions may be associated with a person. The reality is that everything that the governor does is based on work done by colleagues. We have a strong group of deputy governors and very effective executive directors, all of whom work together to create policies. For example, the asset-quality review was done only because we have a tough set of inspectors, who followed through and ferreted out, after looking at a comprehensive set of banks. It was their views which ran this process, than my saying, ‘We need to do this.’ The job of the governor is to set a direction, but it also comes from listening to people. My attempt has also been to institutionalise the processes. In fact in the monetary policy committee, one of the concerns was that historically monetary policy has been based on an individual, and hence institutionalise the process of the policy and move it away from the individual. It is important in this global environment, because individuals may come and go, but the institution remains.

Will you look at improving bad-loan mechanisms as bankers fear that some are not working?

No one should see these procedures as means to avoid recognition (of bad loans). All the troubles start when you see it that way, because then you avoid recognition and say what am I going to do now that I have landed in this situation. You have to look at it upfront. That is the view bankers should have. I have no sympathy if you have landed in a problem because you were trying to postpone it. Instead the focus should be on getting the assets back on track. Find the mechanism that works best. We have a variety of processes — SDR, 5/25, restructuring — we are looking at a couple more. But banks have to help themselves here. They cannot continuously look to the regulator or the government to find a solution, or find some good guy to buy out from me.