Adieu Raghuram Rajan: A free thinker with a 'side job' as central banker

MUMBAI: In a recent interview, Raghuram Rajan described himself as "fundamentally an academic" with the governorship of RBI being a "side job". Perhaps true considering that his three-year term at the RBI was the shortest for any governor after liberalization in 1991 and might be just a blip in Rajan's career.Tenure notwithstanding, the youngest governor at the RBI will leave behind a legacy disproportionate to his tenure.

Most of the headlines that Rajan drew were because of his standing as a public intellectual. He broke the mould of a technocrat as someone who does not make public pronouncements on issues outside his domain. Some saw this as ambition to play a larger role, but his explanation was that these issues like intolerance and crony capitalism were endemic to growth. Rajan was not just a free thinker but with such a personality that it was impossible for him not to air his thoughts.

Rajan wanted the governorship to execute his ideas. The job gave him an opportunity to implement reforms that he had suggested as a consultant to the Indian government in 2008. Most of the banking reforms being implemented today can be traced to a report ­ A Hundred Small Steps ­ submitted by Rajan when he was a 45-year-old professor from University of Chicago after he was appointed consultant by the United Progressive Alliance government. The report pitched for steps like inflation-targeting, broadening bond markets and stronger boards for government banks. For central bank watchers, the success of an incumbent in stabilizing the exchange rate, taming inflation and cleaning up banks would be considered a fair measure of success. But Rajan's legacy goes beyond these issues of macro stability.

He is likely to be remembered for a number of things that he has institutionalized. Since his appointment in 2013 was for a threeyear tenure, Rajan set a three-year time-frame to achieve his agenda which included bringing competition and innovation in banking, cleaning up bank balance sheets, creating a new monetary policy framework, and developing a structure for faster transmission of interest rates to borrowers.

The end of Rajan's tenure coincides with the end of monetary decision-making by the office of the governor. Rajan has successfully pushed for a new monetary policy framework, where interest rates will be decided by a committee rather than a governor. If the new framework functions along expected lines, markets can look forward to seeing a more predictable and stable rate policy which will help develop bond markets.

Monthly Rate Revision
Borrowers can thank Rajan as interest rates on their loans begin to come down every month and not only when banks revise rates.This is possible because of Rajan's decision in December 2015 to take away from banks the freedom to decide when to revise rates. As of now most borrowers have their loans pegged to the earlier benchmark the base rate. According to the RBI, rates will have to be decided based on the "marginal cost of funds". In other words, banks have to routinely calculate their cost of funds and any change has to be passed on to borrowers by revising their benchmark. This new formula-based benchmark is called the marginal cost of lending rate (MCLR). Once most borrowers migrate to the MCLR regime, rates would begin to come down every month.

Let A Thousand Flowers Bloom
Rajan's most understated achievement has been the big jump in innovation in financial services. Before Rajan took charge, a private bank had put up a proposal to the RBI to allow cardless withdrawal from ATMs based on an SMS code generated on the request of the cardholder.The RBI was wary of the service fearing that it would be misused.Rajan, however, was excited about the new solution which he saw as a remittance tool. According to Rajan, a "cash out" facility was crucial for remittances because there is a large recipient population in the country without access to formal banking. "The system will take care of necessary safeguards of customer identification, transaction validation, and velocity checks. We need more such innovative products, some of which mobile companies are providing,“"Rajan said in a Nasscom speech in 2014.

Payments Bank Licence
For years banks had been struggling to use the last-mile connectivity that mobile telecom companies had built. Banks were keen to use the mobile company's recharge networks in rural areas as banking correspondents. They also wanted to reach out to unbanked customers of mobile companies.But mobile companies wanted to be in the game themselves. Regulators were, however, wary of granting full banking licences to telcos as they were either owned by foreigners or part of conglomerates. Rajan's proposals allowed telcos to set up payments banks which could provide transactional facilities like remittances and payments but could not extend loans. This addressed RBI's concerns of corporate banks engaging in self-serving. It also enabled existing banks to partner payment banks to sell their products.

Small Finance Bank Licences
Likewise in the case of microfinance companies, the RBI addressed the issue of microfinance regulation by allowing some of them to convert into banks. While announcing the guidelines, Rajan clarified that the "small" in the title referred to the size of the loans and not to the size of the banks. He said that these small finance banks could grow into giant institutions. This was the key difference between the earlier approach to small business lending and the one taken by Rajan. Earlier local area banks and regional rural banks could not make a dent as their mandate was regional and successful players could not grow beyond a point. After taking charge, Rajan did not waste any time in initiating the reform process.