Restore Stability To Revive Economy

Former Deputy Governor of Reserve Bank of India, Viral Acharya in his latest book - Quest For Restoring Financial Stability in India - has figured out some key issues in India’s financial sector and suggested some measure too, during an interview with Rajat Mishra. Edited Excerpts:

- Rajat Mishra

The RBI came up with a loan moratorium during this pandemic. Your views.

I think there should be some scope in the system for temporary stopgap measures, especially, if the shock is unprecedented like this pandemic, which no one could have anticipated. The shock in terms of working conditions, the inability of large sectors to generate immediate revenues during lockdown can’t be completely left unaccommodated. The moratorium with a sunset clause is the right approach. The idea is to accommodate the temporary problems, without eliminating the discipline of repaying creditors on time.

We need to prepare the financial system for absorbing losses and ensure there is a wherewithal, both in corporate restructuring as well as in personal delinquencies that may arise.

You have always supported decisive recapitalisation of banks. Why do you think this mitigates the adverse impact of the pandemic?

As we expect some economic activity to revive and rebound with COVID getting controlled, we would want the cost of credit for corporations. Those who have productively aided in the revival, should have low cost of borrowing. The undercapitalised banking system is more interested in maintaining hefty margins to generate a quick return on capital. They are not interested in growing their loan book and competing for loans by offering attractive lending rates. So, if we have an undercapitalised banking system fighting legacy loan problems, coming out of COVID will still not aid in economic recovery. They will act as a headwind to economic recovery. Thus it is crucial to ensure the economy doesn’t have a lasting scar from the pandemic.

Do you think RBI has failed in predicting recent situation where banks and NBFCs went bust? What do you suggest?