PSU banks need blood transfusion, not IV drip, says ex-RBI deputy governor Viral Acharya

PSU banks need blood transfusion, not IV drip, says ex-RBI deputy governor Viral Acharya

According to Acharya, the loan moratorium facility to borrowers can't go on forever as it's crucial for public sector banks to enforce borrower discipline

Former Deputy Governor of RBI, Viral Acharya Former Deputy Governor of RBI, Viral Acharya

Former deputy governor of Reserve Bank of India (RBI) Viral Acharya has advocated a credible sunset clause for the debt moratorium announced in the wake of COVID-19 pandemic. He also recommends adequate capital infusion in public sector banks to boost fresh lending to healthy borrowers.  

In an interaction with BusinessToday.In, Acharya said extension of debt moratorium will spoil borrower discipline and impact the health of Indian financial sector. "Unfortunately, what happens in India is that we do not put debt moratorium with a credible sunset clause. We also perpetuate the lack of recognition of debts which are not being defaulted. It allows the borrowers to get away with standard status for long stretches of time, even after they don't make payments. Given the unexpected nature of COVID-19 shock, I would be in support of three to six month lack-of-asset-quality recognition, but that can't go on forever, because you do need borrower disciple to come back," says Acharya.

He says delay in recognition of asset quality norms will impact banks' ability to attract fresh capital. "Those who don't pay have to be marked down - that's the discipline. Then those who have the cashflow will make payments as not doing so will impact their reputation. So, only those who really can't pay will avail the moratorium," he adds.

As private banks continue to raise money amid COVID-19 they don't have a problem of capital. It's a problem more specific to public sector banks, explains Acharya.

"Even if RBI goes to write down the capital of these PSU banks, according to prudential norms, the government is never setting aside adequate funds. It keeps dilly dallying. As an analogy - they give it as an IV drip rather than a blood transfusion, which sort of revives the health of a patient and gets him up, instead of sort of perpetually being in the ICU state," Acharya says.

Acharya, who has recently released his new book on fiscal stability, points out how RBI gets forced to resort to 'accounting tricks', which damages its regulatory prowess. "Why is the exchequer not willing to put up funds for bank recapitalisation? Because they want to keep that money for some other expenditure. Therefore other than creating the space from elsewhere in the fiscal math to actually find the resources to run the banks in a healthy manner, they start leaning on the central bank to play all this accounting tricks. And that compromises the bank regulation. And worse than that, if banks are perpetually low on capital, they act in an extremely risk averse manner to fresh loans," he explains.

According to Acharya, when banks are always focused on rolling over legacy debts, the result is new restructuring packages to keep losses low on paper. "As a result we never pay attention to the needs of the healthy borrowers of the economy. There is no risk capital, there is no growth capital that is actually being set aside. What is needed is a sunset clause on debt moratorium to impose debt discipline along with proper recognition of asset quality in the balance sheet of banks. All of this is possible only if banks are well capitalised," he says.

Also read: Coronavirus has exposed weaknesses of global financial systems: Nobel Laureate Muhammad Yunus