Reserve Bank of India (RBI) deputy governor Viral Acharya has once again raised the prickly issue of independence of the central bank and its lack of powers to regulate public sector lenders. According to the deputy governor, the use of RBI’s balance sheet has also emerged as a point of friction, as also the attempt to appoint a separate payments regulator bypassing the central bank.
“One important limitation is that the Reserve Bank is statutorily limited in undertaking the full scope of actions against public sector banks (PSBs) — such as asset divestiture, replacement of management and board, licence revocation, and resolution actions such as mergers or sales — all of which it can and does deploy effectively in case of private banks,” said Acharya.
The deputy governor also reiterated some of the points made by governor Urjit Patelin the war of words between the RBI and finance minister Arun Jaitley earlier this year, in the wake of the Nirav Modi fraud at Punjab National Bank, where Jaitley indicated that while politicians are held accountable, regulators are not.
Strongly hitting out against the government’s constant pressure to relax asset qualification norms, Acharya said, “Sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a facade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output.” The deputy governor was delivering the AD Shroff memorial lecture in Mumbai on Friday.
“One important limitation is that the Reserve Bank is statutorily limited in undertaking the full scope of actions against public sector banks (PSBs) — such as asset divestiture, replacement of management and board, licence revocation, and resolution actions such as mergers or sales — all of which it can and does deploy effectively in case of private banks,” said Acharya.
The deputy governor also reiterated some of the points made by governor Urjit Patelin the war of words between the RBI and finance minister Arun Jaitley earlier this year, in the wake of the Nirav Modi fraud at Punjab National Bank, where Jaitley indicated that while politicians are held accountable, regulators are not.
Strongly hitting out against the government’s constant pressure to relax asset qualification norms, Acharya said, “Sweeping bank loan losses under the rug by compromising supervisory and regulatory standards can create a facade of financial stability in the short run, but inevitably cause the fragile deck of cards to fall in a heap at some point in future, likely with a greater taxpayer bill and loss of potential output.” The deputy governor was delivering the AD Shroff memorial lecture in Mumbai on Friday.
In his speech, Acharya dwelt extensively on the constitutional crisis in Argentina — where the government had appropriated the central bank’s reserves, triggering a crisis. Explaining the reasons for the differences between central banks and the government, Acharya said, “A government’s horizon of decision-making is rendered short, like the duration of a T20 match...There are always upcoming elections of some sort. In contrast, a central bank plays a test match, trying to win each session but, importantly, also survive it so as to have a chance to win the next session,” said Acharya.
According to Acharya, the reason why a central bank had to be independent was to protect the economy from such short-termism. While recent measures such as setting up a monetary policy committee, recognising the RBI’s role in exchange rate management and interest rate setting had bolstered the RBI’s positions, some actions had undermined them.
The deputy governor said that while elections may drive the government, markets provide the discipline against short-term measures as was seen in the case of Argentina.
“The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions. Interestingly, the market also forces central banks to remain accountable and
According to Acharya, the reason why a central bank had to be independent was to protect the economy from such short-termism. While recent measures such as setting up a monetary policy committee, recognising the RBI’s role in exchange rate management and interest rate setting had bolstered the RBI’s positions, some actions had undermined them.
The deputy governor said that while elections may drive the government, markets provide the discipline against short-term measures as was seen in the case of Argentina.
“The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions. Interestingly, the market also forces central banks to remain accountable and
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