Why did Urjit Patel resign?

Chennai: Urjit Patel landed a shocker when he announced his resignation, much to the dismay of the government that considered him its man on the Mint Street. He stepped down from his role as the governor of the Reserve Bank of India, nearly nine months before his three-year term came to an end.

The resignation came just days ahead of the 14 December meeting of the board of RBI that was to take up issues like governance in the central bank. Patel, who is the first Governor to resign since 1990s, cited personal reasons for the resignation.

The reasons

Kenya-born 55-year-old Urjit Patel had started to raise his voice issues that mattered the most – autonomy and independence of the central bank.

From facing flak for allegedly toeing the government line on the shock decision to overnight junk 86 per cent of the currency in circulation, he overcame obstacles as he followed his predecessor Raghuram Rajan’s goals to clamp down on loan defaults and cleaning up bank balance sheets.

But his tussle with the government started when the latter cited hereto never-used-before provisions of the law to bring him to negotiating table on issues it felt were of national interest.

The Finance Ministry had initiated discussion under Section 7 of the Reserve Bank of India Act, 1934, which empowers the government to issue directions to the RBI Governor.

Also, there was no progress on the decisions taken at the marathon board meet that was held by the RBI board on 19 November. The decisions included framework for weak banks, level of reserves with RBI and its governance structure.

Come 14 December, the board meet of the RBI would have demanded action, further putting pressure on the man who was at the helm of the bank. The government panel at the board of RBI had changed from an advisory to an operational one, which further intensified things at the apex bank.

The friction between the RBI and the Finance Ministry was attributed to the recalcitrance of Patel, who appeared keen to be seen as a defiant, independent-minded governor of high credibility by resisting the government’s call for increased transparency on the central bank’s reserves and for enhanced liquidity so that credit can be eased to money-strapped sectors, especially MSMEs.

Former RBI chief Raghuram Rajan termed the resignation of Patel as a mark of protest and said the government needs to understand what prompted the resignation of Urjit Patel.

What he did

Patel, who took over as the RBI governor on 5 September, 2016, at the 19th floor corner office in Mint Street, faced his first challenge just two months into his tenure when the Centre announced the demonetisation of Rs 500 and Rs 1,000 notes.

He was criticised for issuing more than 60 circulars and critics said the RBI’s autonomy was compromised. However, a recent media report on the minutes of the RBI board meeting signed by him in December 2016 showed he and the banking regulator had some reservations on the decision.

Post demonetisation, Patel began efforts to clean up the banking system and assert the Mint Street’s independence. The first signs were seen when the six-member Monetary Policy Committee (MPC) that included him in June last year ignored a meeting request from North Block ahead of a bi-monthly policy.

After coming under criticism from the Finance Ministry that regulatory lapses had led to Nirav Modi and Mehul Choksi to carry out a Rs 12,600-crore scam, he did not mince words when he said the RBI had limited regulatory powers over PSU banks where the bad loan problem was more acute.

During his reign, the banking regulator also curtailed the terms of at least two chief executives — Shikha Sharma of Axis Bank and Rana Kapoor of Yes Bank even as it took a tough stand on the need to bring down promoter shareholding in Kotak Mahindra Bank and Bandhan Bank.

However, one of his biggest contribution to the central bank will be his work as the head of the committee (he was then the deputy governor) whose key recommendations are followed by the MPC which sets interest rates. The panel had said that retail inflation should be the nominal anchor of the monetary policy framework and that the target should be at four per cent with a band of +/- two per cent.

His replacement

The successor of Urjit Patel will be found by a high-level panel headed by the Cabinet Secretary. Once the panel finalises the name, it will be sent to the Appointments Committee of the Cabinet headed by Prime Minister Narendra Modi.

According to sources, the government will soon initiate the process for appointment of new RBI Governor following the sudden resignation of Patel on Monday.

The Financial Sector Regulatory Appointment Search Committee (FSRASC) is headed by Cabinet Secretary P K Sinha. Apart from him, the panel includes Additional Principal Secretary to the Prime Minister P K Mishra, who is a permanent government nominee, and three other experts, among others.

As per the process, the panel will invite applications from eligible candidates and based on interactions with them will select the candidate. The appointment would be made by the central government on the recommendation of the FSRASC. It is noted that the FSRASC is free to identify and recommend any other person also, on the basis of merit, who has not applied for the post.

Know Patel
Urjit Patel hailed from a business family based in Nairobi. He studied at London School of Economics, Oxford and Yale University and was a Kenyan national until 2013. He acquired an Indian citizenship before he was appointed Deputy Governor of RBI in January 2013.

 

Who is to replace him?
In the absence of the Governor, the seniormost Deputy Governor officiates. That will make N S Vishwanathan the acting head of RBI, for now.
Those who are in the race to replace Urjit are-
* Subir Gokarn, executive director, IMF
* S C Garg, Secretary, Economic Affairs
* Rajiv Kumar, Secretary, Financial Services.

 

How economy changed under Urjit
* GDP went from 7.6 per cent to 7.1 per cet
* Inflation rate went from 4.4 per cent to 3.3 per cent
* Interest rate (Repo) which was at 6.25 was increased to 6.50
* Rupee versus Dollar went from 66.6 in September 2016 to 71.3 in December 2018

Praveen Kumar S