Six months of loan moratorium is enough, says former RBI deputy governor Viral Acharya

On October 26, 2018, the then RBI deputy governor Viral Acharya strongly criticised the government for interfering in the central bank’s affairs, in his speech at A D Shroff Memorial Lecture. Within two years of his speech, he has published a book titled Quest for Restoring Financial Stability in India, which is broadly based on his tenure at RBI. In an interview with Furquan Moharkan of DH, he talks in detail about what led to that famous lecture along with his concerns over the stability of the financial system in India.

Edited excerpts:

Since your book talks about financial stability, we have seen four financial institutions either collapsing or at the brink of collapse in the last two years. Do you think there is something seriously wrong?

In my view, some of these collapses have been idiosyncratic, specific governance failures. Those will always happen and will have to be dealt with. Having said that, there is a scope for improvement. We have to ensure that our financial sector is well capitalised through stress tests. Secondly, RBI also needs to increase its supervisory cadre, along with modernising it in line with global best practices -- and there is a blueprint for it left behind when I quit RBI.

Does asset quality raise concerns over the modus operandi of rating agencies?

This issue has been flagged since the global financial crisis that there is a potential conflict in the rating business. But one thing that we could fix in India is that rating agencies have timely data on defaults. This is something they have been pushing for a while, but it is falling through the regulatory cracks on who should collect this data.

There are talks going on between RBI and the govt on extending loan moratorium and loan restructuring. What kind of problem do you think it will lead to?

I am in favour of loan moratoriums for a very brief period of time. It has to be a temporary stop-gap measure. The corporates would need to restructure their debt because if the revenues aren’t there, you have to bring your debts down. I think debt moratoriums need to be reversed with a sunset clause -- whether it is right away or three months away. By September, it would be six months of moratorium, and in my opinion, that is enough.

You put up a fight for independence of RBI. Many, right now, say that the autonomy of RBI is being eroded. How do you see it?

Ultimately, it is about institutions, not about specific individuals. There are parts where the RBI Act is weak, and we can actually strengthen them by improving the processes of appointment, termination and tenure, that is given to the RBI top management. But the most important part in my view is that the central bank should be allowed to adopt the regulations of the banks which are ownership neutral -- whether they are private sector banks or public sector banks. The central bank isn’t able to take action in the same manner on public sector bank, as on the private ones.

Why did you decide to write a book broadly based on your tenure at RBI?

I think there are two to three reasons for that. First and foremost, former RBI governor Y V Reddy recommended that like some of the previous governors and deputy governors, I should try and bind together my speeches into a book. Also, after my term, I realised that there were actually very common deep under-currents to some of the issues that seem pervasive in not being able to achieve financial stability fully in the country. I wanted to put my thesis in front of every individual. The core idea of the book is that until the balance sheet and finances of the government are in proper shape, achieving financial stability is difficult as it creates relentless pressure on the central bank to accommodate the government’s balance sheet.

Could you tell us more about the build-up to your October 26, 2018 speech? What actually led to it?

As I have always maintained, specific events and individuals aren’t as important as the underlying economic forces. The manifestations of the underlying imbalances keep changing from time to time. Essentially, when the government finances are not being managed too well, the cost of borrowing risks is becoming higher and higher because they are adding more expenditure. The tendency is then to turn towards the central bank to try and accommodate it through compromises in banking sector regulations, compromises in the liquidity, larger transfer of surplus from the RBI balance sheet, and an extended monetary policy. Second, government horizons, because of the political cycles, can become very short term at certain points of time. Now, this is true all over the world. What you need in this case, is that the institutions of the country, which are safeguarding the longer-term issues, need to be unperturbed because of this. This is really the point that we were trying to convey in that memorial lecture.

What about the reserves of RBI that the government was eyeing? What role did that play?

Essentially, the surplus distribution rests with the board of RBI. I can’t comment on what the position of the board was. But, ultimately the benefits from the balance sheet of the RBI, accrue to the government. The question is: Are thee benefits passed away right now, or will they be passed over a period of time. Now, why does this distinction matter? The central bank has to achieve several long-term objectives for the economy and for that it requires maintaining a balance sheet of a certain size. So, when there is a pressure to transfer a very large portion of RBI profits without provisioning for a rainy day, then I call it coercive monetisation. Rather than the government going to the market to borrow, it is forcing the central bank to actually accommodate its expenditure. This is like a freebie for the government.