Overdraft by Dr.Urjit Patel ; Published by Harper Business; Pages 195 ; Price Rs.599/- ************************* Dr.Urjit Patel was the 24th Governor of R B I and resigned on December 11, 2018.He was the first Governor to state personal reasons as a driving factor for his resignation. He is the Fifth RBI Governor to have resigned before the end of his term. In his new book, “Overdraft: Saving the Indian Saver”, he gives some insights on what led to this unprecedented resignation. Dr. Patel’s book is focused on the massive Non-Performing Assets problem, its effect on the economy and financial stability and the way forward. This book adopts the path laid down by predecessors like Raghuram Rajan compiling a book of speeches with introductions and epilogues. Patel’s book banks heavily on his previous academic work, and lectures at various universities in the US and India after he laid down office. It is very meaningful while analysing the bad loan situation in banks and examining solutions to the problems. It serves as a stern warning which ,one hopes the Government would consider carefully. Patel does not spare any stakeholder and clearly points out that everyone has been responsible for the mess including the government which failed to question excessive lending by the banks it owns, and regulators who woke up late to problems and then told themselves, “this time it is different” to the financial media which applauded lenders who had been upbraided by the RBI. According to him RBI supervision teams felt the “Stockholm Syndrome” and came “up with mitigating explanations for not recommending apposite strictures and penalties commensurate with transgressions that have been brought to light”. Three parameters have been highlighted and these are “Fears of the 3Cs (the Central Bureau of Investigation, the Central Vigilance Commission and the Comptroller and Auditor General) . Patel writes “The regulator fell short on several counts in the period leading up to 2014. It failed to challenge assumptions through, for example, more rigorous stress-test scenarios at bank level as well as sensitivity analysis on (demand assumptions) and sector (policy) risks.” A year ago Patel had adumbrated a trilemma in a lecture--- it is impossible for a) public sector lenders to dominate the banking system while having b) independent regulation and c) the government adhering to fiscal prudence. Thus, if the government wants to direct credit flow in the economy and stick to fiscal deficit targets (and not recapitalise banks), then the regulator will have to relax its norms. On the other hand, if the regulator sticks to its guns, and the government continues to do policy interventions through credit, then it has to necessarily recapitalise banks and say goodbye to fiscal prudence. Patel is convinced that independent regulation has taken the hit. Relaxation of norms over time and conferring ease on crony capitalists has become inevitable with objectives of Government being often different. According to the Governor an asset quality review on NBFCs and MSME borrowers was started in a quiet way in 2018 but that “seems to have been postponed”. Even in the case of the Insolvency and Bankruptcy Code, Patel believes Government could have ensured better follow-up. Patel is unhappy with the current RBI dispensation diluting the central bank’s framework for bad loan resolution outside the bankruptcy code. He affirms : “Decisions in 2019 and early 2020 by the government and other stakeholders have increased the likelihood that long-drawn cases are here to stay. Periodic bailout by the government and official entities will likely continue, at least for some banks.” Government continues to lean heavily on the banking system to boost demand. At the same time, bad loans are estimated to shoot up by as much as 50 percent this financial year while regulatory forbearance has re-emerged. Patel sounds a note of warning “We have to be vigilant that U-turns don’t usher a serial bout of ever-greening and zombie borrowers; otherwise, victory over crony capitalism will, at best, be short-lived, and that the limited progress so far could turn out to be a false dawn." The most glaring omission in the book is the absence of a discussion on demonetisation. Patel was RBI Governor when the Modi government implemented the policy, and he received a lot of flak for remaining quiet, back then. But he continues to remain silent on the issue. As RBI Governor in September 2016, Patel worked out the ‘9R’ strategy, which he affirms would save savings, rescue banks and protect them from unscrupulous racketeers. His ‘9R’ strategy is divided into five steps. The first has 4Rs: Recognise, Record, Report and Recovery. The second step involves Resolution of bad loans under the Insolvency and Bankruptcy Code (IBC). In the third step, there is the 6th and 7th R aimed at legally enforcing Resolution and Recapitalisation commitment. The fourth step (8th R) focuses on cementing the change (Reset and Ring Fence) and the fifth and final step calls for Reform, aimed at restoring faith in government banks. Prompt Corrective Action (PCA) norms were relaxed to ‘graduate’ five loss-making government banks out of the PCA framework in early 2019. “Recapitalisation of these PCA banks helped them meet the criterion on net NPAs. Hardly anyone disagreed that this was to facilitate higher credit growth.” Patel talks of two other parties that are responsible. The first are various industry associations that have never criticised the defaulters. One of the reasons as to why banks maintain higher spreads on deposits is that they must provide for these NPAs, which, in turn, impinges on capital. Hence the cost is spread across all borrowers. India Inc cannot shun responsibility and just keep quiet, as it affects everyone. Patel does argue against farm loan waivers and supports agri reforms, which have a more long-lasting effect on the lives of farmers. We have a chapter on governance and less interference from the government when it comes to PSBs. Highlighted by Patel is a significant issue, of the RBI having no power when it comes to PSBs, which was making headlines even when he was Governor. This anomaly must be corrected if we are to show any improvement in this sector as regulation becomes difficult. The book is an essential read for students of finance, economy and commerce. For those entrusted with managing the banking sector, it is a valuable guide and a reminder of the pitfalls of falsehoods. P.P.Ramachandran. 18/10/2020.