Former Reserve Bank of India (RBI) deputy governor Viral Acharya has called on central bankers to not compromise while performing their duties and raise issues with the government even if it comes at the cost of losing their job.
"Sometimes, the tendency of technocrats in central banks is to think, 'Oh, I have to do my regular day job, I have to do a part of my legal mandate well. So, let me just not confront these issues in my day-to-day dealings with the government. Let me just strike compromises or turn a blind eye,'" Acharya said during a webinar hosted by the International Monetary Fund (IMF) on June 14 on the regulation, supervision, and handling of distress in public sector banks (PSBs).
"Of course, there are many technocrats who don't necessarily follow this approach. But I think that a string of technocrats each doing their job in a narrow space and making these compromises, actually leave their countries with a fairly bad outcome stitched together over periods of time."
"I see compromises by central bankers in India over long stretches of time as having given fairly compromised and terrible banking sector outcomes over the last five decades. Of course, if you raise a voice, if you push for advocacy or reform of public sector banks, if you push openly for legal reforms, that is going to be difficult. It can lead sometimes to (chuckles) you not having the right relationships with the finance ministry. In extreme cases it can lead to a loss of job. But my sense is technocrats should embrace these risks," Acharya said.
Acharya took charge as a deputy governor of the RBI in January 2017. However, he resigned in July 2019, around six months before the end of his three-year term, citing "unavoidable personal circumstances".
Acharya, who is the CV Starr Professor of Economics at New York University's Stern School of Business, enjoyed a fraught relationship with the government during his time at the RBI. In an October 2018 speech (external link), Acharya said governments that "do not respect central bank independence will sooner or later incur the wrath of financial markets". The speech, which came amid a tussle between the government and the RBI over the latter's reserves, created a furore.
Acharya’s resignation from the RBI was preceded by similar high-level exits.
Raghuram Rajan, who served a three-year term as the governor starting September 2013, faced repeated political attacks for his speeches regarding tolerance and central bank independence. In a letter to RBI staff in June 2016, Rajan wrote he would be returning to academia after his term ended.
Meanwhile, Urjit Patel — Rajan's successor as governor — resigned on December 10, 2018, two years and three months into the job. Patel, who cited "personal reasons" in a statement announcing his resignation, also had a turbulent relationship with the government.
In his book 'Overdraft', released in July 2020, Patel wrote that India's fledgling bankruptcy law was deliberately weakened in mid-2018 after the RBI released its famous February 12, 2018 circular that spelt out an amended framework for the resolution of banks' stressed assets. According to Patel, he and the then finance minister, the late Arun Jaitley, were "until then, for the most part...on the same page". However, the aforementioned circular led to a "legal onslaught" on the RBI, Patel wrote.
Patel was succeeded by Shaktikanta Das on December 12, 2018. Das, a former economic affairs secretary, has been widely credited with repairing the relationship between North Block and Mint Street.
Cost of PSU banks
In his comments at the IMF webinar on June 14, Acharya said the Indian banking sector and the taxpayer were suffering from government ownership of banks.
"…certain rules and regulations of the banking sector have to be uniform. For example, you can't have an accounting standard for banks which is different between public sector banks and private banks. Why has India not adopted the IFRS (International Financial Reporting Standards) accounting system? Why has India not adopted expected credit loss provisioning? Why has India not adopted accelerated provisioning standards, which don't backload provisions after defaults and NPAs (non-performing assets) have been recognised?"
Acharya said the source of these problems was the government's refusal to loosen its purse strings further to infuse more capital into PSBs. The non-implementation of these standards and PSBs' ability to "get away with certain kinds of extraordinarily delayed provisioning standards", according to Acharya, was resulting in a “race to the bottom for the entire banking sector”.
Calling the presence of PSBs in India a “historic accident”, Acharya said data and economic forces at play in India’s financial sector showed they were causing a huge loss to the taxpayer.
"Taxpayers in India are running a huge negative account because of the presence of public sector banks. And I think any gains that can be brought to the table, such as creation of bank accounts for financial inclusion…I am never able to attribute that success squarely at the doorstep of public sector banks," the former central banker said.
"I constantly pushed for the reform of these banks — improve their governance, and then as a last step, hand over their ownership to the private sector. It seems it's possible to have banking crises even with private banks, so why take on the additional burden of running this through a massive taxpayer loss?"