Wednesday , September 20 2017

RBI Deputy Governor Asserts that using RBI Reserves to Recapitalize Banks is not a Good Decision

RBI Deputy Governor Viral V Acharya said that it is not the right decision to use RBI Reserves for recapitalizing Banks.

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RBI Deputy Governor Acharya suggested a new solution to the pressures of capital constraints and rising NPAs. He said that a restructuring of the banking sector is highly recommended. (Reuters)

RBI Deputy Governor Viral V Acharya also advised that the usage of a part of RBI reserves for recapitalizing Banking Sector is not the right decision. On the virtue of the comprehensive study on the deficit funds required for managing the banks and financial sectors, the Reserve Bank of India transfers its surplus or the dividend to handle any crisis situation, to the Government. Once the money is transferred it belongs to the Government to use it in the way it wants. The Deputy Governor said “I generally don’t like to tie the two (surplus payment and allocation of the money for a purpose) because then you are getting into a difficult situation where you want to dip into the RBI reserves because you want to do something else,” the noted economist said.

“Money is fungible and when you dip into RBI’s balance sheet, you are dipping into it for fiscal expenditure,” he told reporters on offshoots of an IBA event.

“My sense is that we have to keep these things from an accounting perspective settled,” he told the reporters.

Previously Raghuram Rajan also had the same opinion and he opposed the idea.

“This seems a non-transparent way of proceeding, getting the banking regulator once again into the business of owning banks, with attendant conflicts of interest,” Rajan had said adding the Government could utilize the sufficient funds as dividends from the central bank to recover state-run banks’ finances.

The alarming rise of Bank NPAs which deprives the capital reserves, higher buffer necessities under the new Basel-III framework which the system is transferring to and the limited capitals available with the fiscally inhibited Government are among the factors that had led to such a plan.

Acharya said, “I think Government will have to be clever in managing the process so that its ultimate bill for recapitalization is not as massive. I think it is possible to shrink it down in my opinion. I think we will need some surgical restructuring in the banking sector,” he told reporters.

He further said, that there has to be less dependence on taxpayers’ money for the task. “I was proposing the number of different ways that government might want to manage this process because I don’t think so it is good for incentives at banks as well for the country as a whole for the taxpayers to foot the entire bill that might be required for the bank recapitalization,” Acharya told the reporters.

Furthermore, the asset quality review which started in December 2015 is on the roster and will be completed soon, and Rajan has targeted a March 2017 scheduled timeline for recognizing assets.

 

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