Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday called for a more pragmatic approach on the side of both business and policy makers and said while the government should ensure enough leeway for the investor, businesses should also be more considerate about the consumer.
Rajan said basic healthcare, unemployment insurance and old age benefits should be part of the system so that entrepreneurs are free to take risks without having to think afresh on the associated risks.
He said there is a need for having a basic social safety net in the country to boost risk-taking capabilities. This would help entrepreneurs make a fresh start without having to bother about what happens if a business fails.
''Of course, as a poor country, we have to be careful of what we spend ... we should be careful that it is not a gold-plated safety net like the welfare scheme of the US,'' Rajan said at the 27th Yashwantrao Chavan Memorial Lecture at Mantralaya, Maharashtra's state secretariat.
He said failure of business is not necessarily bad but continuing to put in resources for a sick unit is. Instead, he said, resources, including manpower, should be quickly channelled to more productive enterprises.
''Enterprises can fail, but people should not fail. A firm, which is facing a failure shouldn't be occupying resources,'' he said.
''But, it should not be an unfair exit,'' Rajan said, explaining creditors ''somewhat have draconian power'' in the form of some laws that get activated swiftly in the case of small firms but gets incapacitated in the case of a large corporation with access to more resources and lawyers to challenge the power of banks.
''Small firms should not exit too fast, and large firms should not be allowed to last too long,'' Rajan said in his speech.
Since small firms that grow can create more jobs, the business environment should be such that it encourages firms to grow. In this context, Rajan said the government's Startup India initiative can do wonders if a level playing field with transparent, predictable and light regulations are created to foster them.
''RBI is trying to do much more on the web and trying to make regulations simpler,'' he said.
''Anybody should be able to enter and compete and there should not be any special privilege for anyone,'' Rajan said.
Rajan had a word of caution on the excessive cash-burn by start-ups, especially e-commerce firms - getting revenues through deep discounting was not a viable business model for start-ups. ''If the only reason you are getting revenues, not profit, is because you are selling based on 50 per cent discount, it can't be viable in the long run,'' he said.
He also acknowledged that many businesses are could be in different stages of their life-cycle with some trying to establish the viability. ''All these businesses are trying to establish viability, some are still being financed in a big way,'' he said, adding that it is natural for some of them to fail.
Rajan, however, had a different view of the realty sector where discounts are not really discounts. He said real estate developers should cut prices now that interest rates have been lowered. People are not willing to buy at extremely high prices, the government pointed out, adding that at reduced prices more people will be willing to invest in property.
"I am hopeful that as interest rates come down, there will be more credit and buying. And I am also hopeful that prices adjust in a way that encourages people to buy."
The RBI has lowered rates by 150 basis points cumulatively since January last year, and banks have passed on more than half of the rate cuts to consumers by now.
"There is an issue of certainly how they (buyers) see the housing market and how they see prices. There has to be an adjustment so that more people want to go and buy," he noted.
On revival of the real estate sector, the RBI governor said, "My sense is that there is a little bit of everything that needs to happen."
Access to finance
On access to finance, the governor said, the emergence of new-age banks and improving technology would be a ''game-changer,'' adding, under the new bank licence regime, four new banks have been given licences and 18 more would come in the next year.
Most of these banks would be knowing their customers intimately and therefore would supplement large banks who did not always have a lot of knowledge about their customers.
Creating unique identification numbers for small firms, based on the unique ID of the borrower, would make the loan process simpler and reliable for the lenders, he said.
On small finance banks, Rajan said, ''My sense is, this is going to create a revolution in the banking sphere. And a revolution in the banking sphere will create easier access to finance for small entities.''
The governor said he expects each of these banks to start with a higher-than-required capital of Rs500-600 crore, which would entail having an asset book of up to Rs6,000 crore and stressed that these won't be ''tiny banks''.
KYC for the bureaucrat
Addressing the bureaucrats, Rajan said, the Know Your Customer also applies to government officials as well, although in a different way. They should know they are essentially there to provide a service that the government ensures the citizen.
''One could, as senior officials, try to spend a day doing some task which they ask their assistants to do but without revealing who they are and getting the assistance.'' He wanted to introduce a similar system for senior officials at RBI as well. This was in order to sensitise them to the travails of the `Aam Aadmi' and help in better discharge of their duties.