The Reserve Bank of India (RBI) voiced concerns against the government’s attempts to encroach on its freedom, while seeking more powers to regulate state-run banks as it seeks to clean up the country’s banking system.
In a speech in Mumbai on Friday, RBI deputy governor in charge of monetary policy Viral Acharya said that the central bank has limited powers to discipline errant government-owned banks, as it lacks the ability to replace officials, scrap licenses and to push for mergers.
Besides, the government is undermining the central bank’s independence by asking for a greater share of surplus at a time when there is a need to strengthen the bank’s balance sheet, he said.
“To secure greater financial and macroeconomic stability, these efforts need to be extended to effective independence for the Reserve Bank in its regulatory and supervisory powers over public-sector banks, its balance sheet and its regulatory scope,” Acharya said in the speech, which was inspired by RBI Governor Urjit Patel’s encouragement to explore the theme.
“Such endeavors would be a true inclusive reform for the Indian economy’s future,” he said, adding that a central bank needs to be independent so that loan losses of banks are not swept under the rug by compromising supervisory and regulatory standards.
The comments came after Indian media reported that unnamed government officials wanted an easing of stringent rules under which a handful of state-run banks are being kept.
Twelve banks — 11 in the public sector and one in the private sector — are under India’s Prompt Corrective Action framework, which imposes lending restrictions, and limits on branch expansion and dividend distribution on banks.
In a speech two weeks ago, Acharya said that this corrective action was “indeed the required medicine to prevent further hemorrhaging of their balance sheet.”
Some of the weak banks are slowly being nursed to health.
Acharya also called on the government not to bypass the central bank’s powers over payment and settlement systems by appointing a separate payments regulator.
“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; their wiser counterparts who invest in central bank independence will enjoy lower cost of borrowing, the love of international investors and longer life spans,” he said.
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