Why did Urjit Patel resign? Government's man finally found own voice on issues that mattered most
Former RBI Governor Urjit Patel, 55, from being considered a government man on the Mint Street, after supporting demonetisation move of PM Narendra Modi, has in less than two-years emerged from the shadows to find his own voice on issues that mattered the most -- autonomy and independence of the RBI. Patel, on Monday, announced his decision to step down as the RBI Governor, nearly nine months before his three-year term was to come to an end.
Hailing from a business family based in Nairobi, Patel, who studied at London School of Economics, Oxford and Yale University, was a Kenyan national until 2013. He acquired an Indian citizenship before he was appointed Deputy Governor of RBI in January 2013. Image source: Reuters
Urjit Patel flak for allegedly toeing the government line on the shock decision to ban Rs 500 and Rs 1000 currency notes overnight thereby junking 86 per cent of the currency in circulation, he overcame all that as he followed "wisdom of an owl" in clamping down on loan defaults and cleaning up bank balance sheets. Image source: Reuters
Urjit Patel was often considered reticent, rigid, uncommunicative and someone who appeared reluctant to meet and consult not just finance ministry officials but his own colleagues in the bank. However, Urjit Patel meticulously conducted the "deep surgery" initiated by his predecessor Raghuram Rajan to clamp down on loan defaulters, while seeking to safeguard the Indian banking system from any collateral damage. Image source: Reuters
Patel, who is the first Governor to resign since 1990s, cited personal reasons for the resignation but industry watchers say there were undercurrent since the the government cited hereto never-used-before provisions of the law to bring him to negotiating table on issues it felt were of national interest. Image source: Reuters
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 (just how much is necessary for stability operations) and for enhanced liquidity so that credit can be eased to money-strapped sectors especially MSMEs. Image source: Reuters
While he maintained central bank's independence in handling bad loan cases, RBI drew criticism for taking an awfully long time to disclose the final number of junked currency notes that came back to the system -- something which suited the government. But genesis of his resignation may have been in the recent escalation of tensions between the RBI and the government after the finance ministry initiated discussion under the never-used-before Section 7 of the Reserve Bank of India Act, 1934, which empowers the government to issue directions to the RBI Governor. Image source: Reuters
RBI deputy governor Viral Acharya had in a speech in October talked about the independence of the central bank, arguing that any compromise could be "potentially catastrophic" for the economy. The issues that brought them head on included appropriate size of reserves the central bank must maintain, easing of lending norms to ease liquidity rules certain sectors and guidelines for weak banks. Image source: PTI
Among the flashpoints in the dispute between the two was an RBI circular in February that tightened default norms. Also, the RBI resisted the state's request for a higher payout from the central bank's reserves, apart from measures that the government had sought to increase credit growth in order to boost economic activity and generate jobs. Image source: Reuters