They came. They saw. But left without conquering. Dr Urjit Patel and Dr Viral Acharya’s tryst with the RBI as Governor and Deputy Governor respectively was short, but the duo’s synchronised moves shook the banking sector and the sovereign for the most part of their tenure.
Both released their books last Friday, and should be read together for a 360-degree view of the ills ailing India’s banking sector, how the government caused its destruction, and is unwittingly rooted to its spot from making it any better. But neither offers an account of the differences with the bureaucracy and how and when the government wields its influence.
If Patel’s book Overdraft dealt at in length about the genesis of bad loans led by the government while the banking regulator astonishingly looked the other way, Acharya’s book Quest For Restoring Financial Stability in India, is a collection of his speeches at RBI and working papers with policy prescriptions.
Their tenure was the most tenuous in recent memory and their relationship with the government swung from receiving adulation to being at the line of fire in no time, as Acharya notes.
Tied to a common goal of overhauling the financial system, they proposed decisive reforms to change ownership of state-run banks, putting weaker lenders under stringent Prompt Corrective Action (PCA) norms, enforcing timely recognition of losses and resolution of stressed assets and pushing for full disclosures on bank defaults.
The progress achieved on each varies. Some like re-privatisation of banks or the bad bank remained as proposals, while others like NPAs recognition saw moderate success though the next critical steps including restructuring or resolution have much ground to cover.
Patel, Acharya and the Centre-RBI relationship
Patel divulged little about what caused his exit, pinning it all down to the lack of progress on IBC, but seasoned observers will recall how the rift between Mint Street and North Block widened to a personality clash endangering intellectuals’ and institutional credibility. Both books have exhaustive data on bad loans, laxity in central banking regulation and the imposing role of government. But such a diagnosis and regulatory recommendations was a path several governors and committees have taken in the past.
That’s because, the overarching presence of state-run banks and public sector enterprises, where government dominates and affects outcomes isn’t new. We have been living with the fact that the! sovereign isn’t at arm's length from regulators, while the fight for regulatory independence and autonomy goes round the clock. Unlike past governors who served with persistence even when government brooks no dissent, Patel-Acharya’s disagreements morphed into a public spat in short time.
If only, the ivy league economists brought a unique approach to problem-solving and deployed out-of- the-box thinking to avoid confrontation and embarrassment. Policymaking in India is mired in bureaucratic complexities and government has multiple obligations to serve. The question is if it’s even possible to right the wrongs of several decades in a year or two without facing dissent just like how RBI replaced over a dozen restructuring schemes with just one, which become popular as the February 12 circular.
Can the sovereign, even if it wills, take such a radical step to end dual regulation of state-run banks, or separate debt management functions from RBI or privatize banks overnight? Or give up its indulgence in pork-barrel politics and subsequent credit-fuelled economic booms and reduce fiscal dominance only to allow monetary policy’s stated goal of inflation? If government’s achievements can’t be judged based on one term, regulators’ attempts in 1-2 years is too little to overhaul the very foundation of our financial system.
While Patel and Acharya laid a roadmap to course correct, perhaps one should walk an extra mile to outsmart anticipated bureaucratic hurdles and prevail despite differences. Both have much to tell and reflect on how not to get on the wrong side of the sovereign that could help a great deal in improving regulator-government dialogue. Particularly Patel, who is yet to break his silence on demonetisation and how essential is it for successsive governors to master the art of saying no. Perhaps that warrants another book or two. Over to Patel and Acharya.
The inflection points
Their collective optimism went sour as capital standards and PCA norms were diluted, besides intense pressure to open up liquidity and credit taps to prop up the economy. All hell broke loose when the govt proposed to alter RBI’s governance structure. Patel eventually quit and Acharya followed six months later.