Reserve Bank of India Governor Raghuram Rajan has stressed that neither the regulator nor the Centre favours undervaluing the exchange rate as a way to sustain growth in the economy.
“When people look at growth of countries like China, Japan and South Korea, they sometimes argue that the way enterprises grew was through an undervalued exchange rate...and that we should try the same in India,” Rajan said at the India MSME Summit hosted by CII.
There are lots of problems with undervaluation, some of which are reflected in the conditions these countries find themselves in today, he warned.
“I personally believe that sustained undervaluation over a long period of time is not a feasible or desirable strategy. Which is why I firmly believe in the RBI’s philosophy of not focusing on the level of exchange rate or trying to manipulate it up or down... but trying instead to minimise situations of extreme volatility, and intervening in situations when the exchange rate becomes extremely volatile in either direction.”
Reasonably stable Exchange rate should not be a source of either comparable advantage or comparable disadvantage, Rajan said. “We want to make it reasonably predictable, reasonably stable. The advantage for SMEs (small and medium enterprises) must come instead from their own capabilities….from their cost-effectiveness, innovativeness, ideas and systems…not from any exchange rate undervaluation,” he added.
“We’re making some significant changes there to facilitate the kinds of start-ups that we’re seeing already in the system. We need to still do more work in a number of areas.”
NPA norms “I want to emphasise again and again that NPA (non-performing asset) norms are not about blaming a person; it’s all about accounting. It is always useful to maintain a constant NPA norm…”
Rather than change the definition of NPA, treat the person whose loan has become an NPA in a compassionate fashion, more so if there’s value in the enterprise.
Changing the norm dilutes and obscures accounting and it is not really the way one should go about.
It must be ensured that even if a small firm turns into an NPA, the bank is willing to support it, Governor Rajan said.
MSME portal While referring to MSME’s access to loans, Governor Rajan said the Reserve Bank is discussing with the Indian Banks’ Association and other stakeholders about a proposal for an MSME portal, on the lines of the Vidya Lakshmi portal for educational loans. “Could we think of a portal where micro, small and medium enterprises could fill in common application forms for borrowing from banks?”
The system works likes this – the demand for an MSME loan is directed to one bank. Once that loan demand is registered, the concerned bank would have to acknowledge receipt and reply within a specific time.
This is sought to be done in a manner that if the loan is rejected, the application could be ported to another bank and so on, Rajan said.
Unique IDs for businesses is another idea in the pipeline. This is potentially a very important development. Here, the Centre could figure out a way to link these IDs with proprietors/directors, so that these enterprises could borrow against the creditworthiness of the latter.