The Reserve Bank of India’s Deputy Governor in charge of monetary policy, Viral Acharya, recently surprised many with his candid remarks that reforms of public sector banks have taken a back seat. In the RBI’s biannual Financial Stability Report, released at the end of June, he said: “…governance reforms and market capital-raising appear to have again taken the back seat at the PSBs [public sector banks]…”
Why should we take note?
In August 2015, the BJP government launched ‘Indradhanush,’ an ambitious plan to reform PSBs. The first step was to separate the chairman and managing director’s (CMD) post; the Banks Board Bureau was formed to select board-level appointments. However, though the idea was to distance the government from such appointments, as suggested by the P.J. Nayak Committee, it continues to hold sway. Several PSBs have not had a chairman for months.
The IDBI Bank, for example, did not have a chairman for the last three years, since the post was split. In this backdrop, some plain speak from Mr. Acharya was not unexpected. He has been speaking his mind at closed-door meetings as well. At the April monetary policy committee meeting — the minutes were made public later as is the convention — he said he would vote for ‘withdrawal of neutral stance.’ This gave the market the signal for a rate hike in the next policy review of June, though the RBI officially maintained a neutral stance.
What is his core expertise?
Mr. Acharya was a C.V. Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business, having completed his doctorate on banks and financial institutions from the same institute. An alumni of the Indian Institute of Technology, Mumbai, he has co-authored several research papers with former RBI Governor Raghuram Rajan.
While he has been entrusted with monetary policy at the RBI, it has not stopped him from lending his expertise in other issues. In fact, his initial contribution to the RBI was to push the resolution of stressed loans which culminated in the banking regulator nudging banks to file bankruptcy proceedings against large defaulters. This was possible after the government amended the law to give more powers to the central bank for resolving banking sector stress. The resolution process is under way and will hopefully clean up banks’ balance sheets — a prerequisite to fund credit demand when economic activity starts picking up. While restoring the health of the public sector banks reeling under huge non-performing assets is critical, reforms in their governance are equally important.
Without such reforms, the problem of reckless lending could come back to haunt them again.
What is in store?
At 44, Mr. Acharya is one of the youngest Deputy Governors. He took charge on January 20, 2017, for a three-year term. Mr. Acharya, who sings Kishore Kumar songs, is also known as the ‘poor man’s Rajan’. Once on a flight, a co-passenger seeing his notes containing words like ‘crisis’ and ‘banks’ called him Raghu Rajan. “That was the day I realised if I have Raghu [Raghuram Rajan] as my role model and even I hit 5% or 10% of that, I can easily pass off as a poor man’s Raghu Rajan,” he said once in a lighter vein. Mr. Acharya’s push for reforms in the PSBs would certainly please Mr. Rajan’s successor and his current boss, RBI Governor Urjit Patel. Soon after the massive fraud at the Punjab National Bank unravelled earlier this year, Mr. Patel had spoken out about the central bank’s limited powers in checking malfeasance at government banks. The RBI cannot remove their directors or management, can do little to hold their boards accountable, and cannot force mergers or liquidation of these banks. Mr. Acharya’s comments lend more urgency to the central bank honcho’s call for legal reforms to ensure that the public sector banks face the same scrutiny as their private peers.
(Adapted from the Hindu)