Viral Acharya takes on govt for trying to get RBI to relax PCA, getting RBI to give up more of its surplus and to appoint a separate payments regulator
RBI deputy governor Viral Acharya on Friday ripped into the government’s interventions in the central bank’s autonomous regulatory space, while iterating that it actually needed more powers to regulate public sector banks (PSBs). A government’s horizon of decision-making is rendered short like a T20 match, he said, using a cricketing analogy. In contrast, he said, “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, and so on.”
Acharya’s remarks came amid simmering tensions between the government and RBI over a government-panel proposal to have a payments regulator outside the central bank and the finance ministry’s attempt to get the RBI to agree to relax its stringent corrective regime for weak banks.
Denouncing the Centre’s oft-repeated demand for a much higher share of the RBI’s ‘surplus’, he said, “the central bank needs a strong balance-sheet to perform its full range of critical functions.” The deputy governor’s remarks, one of the most explicit and trenchant criticisms of government’s incursions into the RBI’ turf by an incumbent RBI functionary, exhibited the MintStreet’s growing unease over the recent developments.
Delivering a lecture “On the Importance of Independent Regulatory Institutions – The Case of the Central Bank,” in Mumbai, he warned that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.” Unlike governments guided by ‘short-termism’, the central bankers have “horizons of decision-making that tend to be longer, spanning election cycles.”
A government panel had recommended that the central bank governor be replaced as chairperson of the Payments Regulatory Board with a person appointed by the government in consultation with the RBI. “Changes should not result in existing foundations being shaken and the potential creation of disturbances in an otherwise well functioning and internationally acclaimed structure as far as India is concerned,” the RBI had said in a dissent to the amendments proposed to the Payment and Settlement Systems Act, 2007.
When the RBI board met earlier this week, the government nominees on the board pitched for a relaxation of the central bank’s prompt corrective action (PCA) framework for weak banks, stating that such forbearance was necessary to create headroom for growth and enable stressed PSBs to lend more and support the efforts to ease liquidity crunch being faced by NBFCs. The RBI had, however, stoutly resisted the proposal; in fact, Acharya had said earlier that without the PCA imposition, some banks would have witnessed even higher losses and required even higher taxpayer money for recapitalisation.
Many including former chief economic adviser Arvind Subramanian had suggested that the central bank’s ‘excess capital’ could be redeployed to bolster the capital base of state-owned banks. Others including Former RBI governor Raghuram Rajan had denounced the proposal, saying if implemented it could get the banking regulator into the business of owning banks with resultant conflicts of interest.
“While the Reserve Bank has always derived several important powers from the Reserve Bank Act, 1935 and the Banking Regulation Act, 1949, what matters is the effective independence with which these powers can be exercised in practice,” Acharya noted.
The RBI deputy governor also said that in regulation of public sector banks, the Reserve Bank is “statutorily limited in undertaking the full scope of actions such as asset divestiture, replacement of management and board, license revocation, and resolution actions such as mergers or sales — all of which it can and does deploy effectively in case of private banks.”
The perception that the RBI capital is in excess of what generally other central banks have is because of the amounts held in the currency and gold revaluation account (which stood at Rs 5.29 lakh crore on June 30, 2017). The gains arising out of revaluation of foreign currency assets are notional and cannot be treated as free reserves that could be transferred to the government, experts reckon.