RBI diluting measures prescribed for financial stability, says former deputy governor Viral Acharya

The Reserve Bank of India (RBI) has been diluting some of the toughest measures prescribed for financial stability, said former Deputy Governor Viral Acharya. We are certainly showing signs of willingness to accommodate and compromise, he said.

"Look at the number of forbearances we have rolled out. The real question is, now that IBC (Insolvency & Bankruptcy Code) is not producing resolutions in a timely manner, will the central bank do an asset quality review? The RBI should use the Financial Stability Report’s stress test right now to recapitalise the system," Acharya told The Economic Times.

Acharya had ended his tenure prematurely reportedly owing to a tussle with the Centre over the RBI’s autonomy.

Restricting lending by weakly capitalised banks, recognition of bad loans as per global standards, a national credit registry to monitor borrowers and a default clause that made banks begin talks on resolution even if the borrower falls behind in payments by a day, were among the measures that the government wanted relaxed.

"Some of these measures were important to ensure that the banking system does not become vulnerable to short-term pressures," Acharya said, adding that while some of these have been rolled back, others have been diluted.

"We are still not ensuring timely capitalisation of banks based on forward-looking stress," former deputy governor said.

Acharya also criticised RBI's decision to move its liquidity stance to 'surplus' from 'neutral'.

"If the MPC (Monetary Policy Committee) is controlling the policy rate, then the system has to be in 'deficit' mode, or in a small surplus," he said.

On paper, the RBI wants to say that the rate is controlled by the Monetary Policy Committee (MPC). However, in execution, it wants to control interest rates, he said.

Acharya further said that recognising bad loans and resolving bankruptcies in a timely manner is crucial to reviving economic growth post-COVID. "Only adequately capitalised banks can ensure growth, not the weak ones," he added.