Acharya:Using RBI funds to recapitalise banks not a good idea

RBI deputy governor Viral V Acharya today suggested that using a part of the Reserve Bank reserves for recapitalising state-run banks may not be a good idea.
After an assessment of the money required for handling various stress scenarios in the banking system and the financial markets, the RBI transfers its surplus or the dividend, to the government. Once it transfers the money, it is for the government to use is the way it wants, the newly appointed joined deputy governor said.
"I generally don't like to tie the two (surplus payment and allocation of the money for a purpose) because then you are getting into a difficult situation where you want to dip into the RBI reserves because you want to do something else," the noted economist said.

"Money is fungible and when you dip into RBI's balancesheet,you are dipping into it for fiscal expenditure," he told reporters on sidelines of an IBA event this evening.
"My sense is that we have to keep these things from an accounting perspective settled," he said.
It can be noted that Raghuram Rajan had also opposed the idea.

"This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, with attendant conflicts of interest," Rajan had said adding the government could take sufficient funds as dividends from the central bank and improve banks' finances.

Growing NPAs which drain the capital reserves, higher buffer requirements under the new Basel-III framework which the system is migrating to and the limited resources available with the fiscally constrained government are among the factors that had led to such a plan.
Acharya, who suggested a new model for dealing with the threats of capital constraints and rising NPAs, said a restructuring of the banking sector is needed.
"I think government will have to be clever in managing the process so that its ultimate bill for recapitalisation is not as massive. I think it is possible to shrink it down in my opinion. I think we will need some surgical restructuring in the banking sector," he told reporters.

Drawing from his speech, Acharya said there is a need for reducing the dependence on taxpayers' money for the task. "I was proposing the number of different ways that government might want to manage this process because I don't think so it is good for incentives at banks as well for the country as a whole for the tax payers to foot the entire bill that might be required for the bank recapitalisation," Acharya said.
He also said that the asset quality review started in December 2015 is on schedule and will be completed soon, wherein Rajan had targeted a March 2017 timeline for recognising assets.