Backing Acharya, experts say govt's undue pressure on RBI causing friction

Instead of taking hard steps to reform PSBs, Centre continues to pass the buck and makes unwarranted insinuations, say retired RBI official

Former senior officials of the Reserve Bank of India (RBI) and banking experts are in favour of the hard-hitting speech by RBI Deputy Governor Viral Acharya, accusing the government of undermining the apex bank’s authority.

The main problem, they feel, are the statements by government officials blaming the RBI on critical issues such as slowdown in the economy, fall in the rupee or problems with public sector banks (PSBs). “The government itself is unwilling to take any harsh decision. Only a handful of the recommendations of the P J Nayak Committee have been implemented. Instead, government officials make loose statements on the rupee or economy, which are more harmful,” said a retired RBI official.  

A retired central banker said the friction between the government and RBI is evident now. And Acharya has chosen to articulate where the RBI stands, indicating assertion of autonomy. “The tussles in the past were more between the RBI officials (governor and deputy governors) and government officials on the central bank board. But the RBI’s view always took precedence,” he said.

There seems to be a division amongst nominated members itself this time and some are assertive, leading to a perception that the government is trying to work through its nominees on the RBI board, he added.

Clashes between finance ministers and RBI governors are not new. However, RBI officials point to a statement made by former Governor Bimal Jalan, who was speaking in a CAFRAL event in 2014. “What I am trying to say on the so-called “autonomy” is that these are issues where the government and the RBI need to consult and decide together…. If you don’t have a problem, you got autonomy. But if you have a problem, it has to be consultative. There has to be consensus and the consultative process is of extreme importance.”

Jalan had given the example of the Asian crisis, when ministers of a new government in 1998 made public statements that the rupee should be strong. Immediately, the attack on the rupee intensified as no market player expected the RBI to succeed. After discussions with the government, there was consensus that the RBI should be given flexibility to manage the exchange rate. “With support of the government, this policy proved to be highly effective in preventing a balance of payments crisis,” Jalan had said.

The consultative process, this time around, is missing, said a former RBI official. From the times of demonetisation, when the RBI took significant flak, things have not been on firm ground. More recently, the RBI put out a dissent note on payment systems amendments proposed by an inter-ministerial committee. There, it publicly challenged the committee that there was “no evidence of any inefficiency in payment systems of India”. Acharya’s speech comes after this dissent note.

A senior banker said the issue of surplus from the central bank, too, has been going on for some time. But as a senior banker, who has been part of committees on this subject said, while room can be made for more surplus during the bad years, there should be a rule-based method, not an ad hoc system.

Nachiket Mor’s removal from the RBI’s central board is yet another case in point. Even though Mor was a government appointee, he used to support the RBI on most issues, considering his past experience as a commercial banker. By cutting short Mor’s second term, and inducting members who would work to dilute the PCA and other such restrictive norms, the government wanted to ensure the RBI falls in line.

Senior bankers say that government nominees on the RBI board have been constantly putting pressure to ease guidelines under prompt corrective action (PCA). The RBI has argued that at least 8 to 12 quarters are required to show good results of PCA. In addition, the RBI also wants restrictions on deposit-taking by these PCA banks, as excessive deposits become a matter of risk for these banks. This is something the government nominees on board of the RBI are against.

Interestingly, an April 2017 working paper study by the central bank had found that in India the cumulative default rate of firms rated ‘AA’ and below was far more than international levels. The central bank took this study in its fight against the government officials who wanted the RBI to tone down the February 12 circular.
 

It argued that the likely loss would be far exceeding the capital expected to be infused in banks, and therefore, the central bank ought to carry on with its PCA framework of weak banks, and also stick to its terms of the February 12 circular on defaults.