Former RBI Deputy Governor Viral Acharya in his latest book “Quest For Restoring Financial Stability In India”, says that fiscal dominance in India has become a mainstream practice that hinders the growth of banks and eventually results in the slow growth of the nation. His critical views on RBI’s functioning and the central bank’s relationship with the government have become the talk of the town. Let us simplify them and understand.
Crux of the Matter
Acharya on Fiscal Dominance
Viral Acharya is a former RBI Deputy Governor and currently a professor at NYU Stern. He has mentioned that Fiscal dominance is hampering the growth of India. Fiscal dominance is a situation in which the government has high debt and deficit. Because of limited funds, the government is unable to recapitalize public banks when they have to recognize bad loans in the books. Instead, the government pressurizes RBI to ease credit norms so that banks can avoid NPA recognition. This is like keeping the house clean by shoving al the dust under the carpet. Acharya said that it is not too late to infuse capital into banks and NBFCs.
On Non-Performing Assets
In an interview with India Today, Acharya said that growing NPAs during Covid-19 would be a concern. NPAs are expected to rise to ~12.5%, i.e. of the ₹100 loans given by a bank, ₹12-13 would be unrecoverable and banks will have to set aside a provision for the bad loan.
NPAs are loans that cannot be recovered. Viral Acharya also criticized the practice of evergreening of loans in India. Let us understand it through an example what it means and what are its implications:
Mr. A took a loan of ₹10 lakh but is now unable to pay back the principal amount and/or interest. Now, Mr. A may take an additional loan to pay off the interest, or principal and interest both. Banks allowed this practice because that particular loan would not have to be categorized as an NPA and hence, no provision amount needed to be set aside.
On RBI’s Autonomy
Acharya writes in the book that RBI’s autonomy was being compromised and hinted that he left for the same reason. Acharya left the post before the completion of his tenure. He also pointed out that Former RBI Governor Urjit Patel would have also left for a similar reason.
The government was trespassing on the autonomy of the regulator, rowing back on prudent measures and making unreasonable demands.Viral Acharya, Former RBI Deputy Governor
Urjit Patel’s Resignation
Urjit Patel possibly resigned amidst the government trying to dilute the clause of Prompt Corrective Action. PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. Besides that, the government wanted RBI to formulate policies to help it borrow more and ease up on defaulters. It also wanted the RBI to transfer surplus funds in the form of an interim dividend a few months before the 2019 Lok Sabha elections. All these factors might have caused Patel’s exit.
- “Yaadon Ke Silsile” is a music album by Viral Acharya. The funds raised through the album were funneled into charity – Pratham – which works to educate children.
- “The Third Pillar: How Markets and the State Leave the Community Behind” is a book by Raghuram Rajan. The book was shortlisted for the financial times and McKinsey business book of the year award 2019.
- As of January 2017, Viral was appointed to serve a three-year term as a Deputy Governor of the Reserve Bank of India. He resigned from the post in July 2019 with 6 months left for his completion of a term.
- NDTV – India Risks “Japanification”: Viral Acharya, Ex-RBI Deputy Governor
- India Today – Recapitalising banking sector key to India’s economic recovery: Viral Acharya
- Money Control – Viral Acharya in new book: Urjit Patel’s exit caused by govt attempts to undermine RBI autonomy
- Wire – Raghuram Rajan Explains the Origins of India’s NPA Crisis