Mumbai: Urjit Patel quit prematurely as Reserve Bank of India governor because of attempts to undermine the institution’s autonomy, according to a new book by former deputy governor Viral Acharya.“A complete degeneration into excessive monetary and credit stimulus that had caused the Indian financial sector to lose its stability in just the previous decade had been rendered difficult,” Acharya writes in the preface to Quest for Restoring Financial Stability in India. “Nevertheless, attempts to alter the governance structure of the RBI to institutionalise such outcomes in future would have meant crossing the Rubicon and had to be foiled. As a result, the RBI lost its governor on the altar of financial stability.”The government wanted the central bank to transfer excess capital as dividend to the treasury, dilute Prompt Corrective Action (PCA) norms, go slow on defaulters and sought an easy policy that would have helped it borrow more, Acharya alludes. It invoked the never-used Section 7 of the RBI Act to direct the regulator on policy matters.Patel himself suggested, in his own book that’s just been published, that the crux of the dispute over which he left was the rigour with which the regulator wanted to crack down on corporate bad loans under the Insolvency and Bankruptcy Code (IBC).Like Patel, former RBI deputy governor Acharya also quit before his term was over in 2019.‘Tide Turned in 10 Months’The New York University professor is more candid than his former boss about the tussle between what he regards as a regulator fighting for a sound and prudent banking system and a government that began on the right path but retreated due to fiscal profligacy and lobbying pressure.“The government of India had announced a significant recapitalisation package for the public sector banks with a plan to reward healthier banks; weaker public sector banks were put under the PCA framework which was tightened to get closer to the framework in the US; and most significantly, the resolution of large non-performing bank assets was put on a fast track,” Acharya writes. “At times, it seemed — even if only as wishful thinking for a moment — that (re) privatisation of a few public sector banks might also be on the table.”But the tide turned in the space of 10 months and, according to Acharya, the government was trespassing on the autonomy of the regulator, rowing back on prudent measures and making unreasonable demands that led to the resignation of Patel in 2018. Acharya’s book is a compendium of his speeches, research and comments as member of the Monetary Policy Committee — mostly concerned with central banking. The assessment of the RBI’s performance during the period of his deputy governorship and its future are contained in the lengthy preface and the book’s epilogue.While the government wanted the central bank to toe its line on several issues, one dispute — the demand to open the liquidity spigot for non-banking financial companies after the IL&FS default — doesn’t seem to have played as critical a role. “RBI’s decision not to offer substantial regulatory forbearance and emergency funding to non-bank and housing finance companies had support from some parts of the government but not others,” Acharya writes. “It is notable that, in this case, the decision did not have direct fiscal implications for the government unlike the decision to forbear on banks.”‘Evergreening’ of LoansAcharya also points to the manner in which a private bank currently in the midst of a rescue played a key role in “evergreening” of loans by shadow banks.“Early conversations with short sellers suggested that besides poor underwriting, there had been diversion of funds to shell companies during the boom,” he writes. “Consistent with the saying the ‘shadow always touches the feet’, evergreening of poor loans by a part of India’s shadow banking lay at the doorsteps of India’s banking, notably of one private bank.”One overriding theme — whether during his term at the RBI or in the book — is the adverse impact of fragile government finances and the push to camouflage this through dilution of banking rules and the deleterious long-term impact of this on growth. While there can be some tinkering due to the compulsions of the political economy, there is a need to fight for prudence, is Acharya’s message.Financial Stability“As financial stability often requires enduring short-term pain for long-run growth, it is not easy to be its gatekeeper anywhere in the world, and certainly not so in India,” he writes. “To the extent I had some influence as a deputy governor of RBI, I did not strike compromises on what really mattered for restoring financial stability, neither with the governors nor with the government of India. At times it wasn’t easy, but I continue to believe that it was worth fighting for. It was the right stance.”Acharya had famously got into a spat with government officials over his “wrath of markets” comment in October 2016 related to institutional autonomy.
from Economic Times https://ift.tt/2OZSjda
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