Hours later, the RBI uploaded a speech another deputy governor, NS Vishwanathan, gave at XLRI Jamshedpur earlier this week. In his speech, Vishwanathan attacked the government’s arguments for easing capital requirements, saying that it would result in banks being strong only in a “make-believe” manner.
Economic affairs secretary Subhas Chandra Garg, the finance ministry’s point person for managing ties with the RBI, fired the first salvo when he took aim at Acharya’s comment that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets”.
Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?” economic affairs secretary Subhas Chandra Garg tweeted on Friday.
Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week an… https://t.co/odLeTt4R5i
— Subhash Chandra Garg (@SecretaryDEA) 1541136220000
Ironically, Garg’s very public dig at governor Urjit Patel’s hand-picked deputy came just two days after the finance ministry issued a carefully-worded statement that among other things signaled its displeasure with the RBI for airing its differences with the government.
Vishwanathan, who unlike Acharya is a career central banker, appeared to be at odds with the government’s push to accelerate bank credit when he indicated that higher growth in lending was not desirable. “It may be noticed that in the past, high levels of credit growth due to ‘supply push’ have resulted in high corporate leverage and consequent NPAs in the banking system,” he said.
“We must guard against any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality.”
This appeared to be a response to financial services secretary Rajiv Kumar’s statement last week that minimum common equity (CET) Tier I ratio as prescribed by RBI stands at 5.5% as against 4.5% under Basel III norms. A relaxation of the capital requirement to Basel III levels would enable bank to lend up to Rs 6 lakh more. But, according to the deputy governor, current levels of provisions maintained by banks may not be enough to cover the expected losses due to defaults, and hence adequate buffers must be built to absorb the expected losses which are under-provided.
Vishwanathan said that bank credit was already growing at 14% year on year in line with GDP growth. Within this, bank loans to NBFC during this period grew 48.3%.
According to Vishwanathan, international capital norms have been designed based on internationally observed recovery rates. However, the loss given defaults are far more than those observed internationally. He also shot down arguments that some defaults are caused by external circumstances and that regulations should treat them differently based on the reasons behind them. “This is a fallacy. There are two issues here: recognition and resolution. The recognition of default or accounting for deterioration in the quality of asset should be independent of the reasons for such default or deterioration.”
from Times of India https://ift.tt/2CVNYTu
