Fiscal, monetary discipline important, says RBI chief Urjit Patel

Urjit Patel

Reserve Bank of India (RBI) governor Urjit Patel has said it is important for a country to maintain monetary and fiscal discipline if it is to attract investors from abroad. And, justified the central bank's stance on high provisioning toward stressed assets.

Patel was speaking at an international banking seminar of G-30 nations at Washington on October 15, where he used the phrase 'virtual apartheid' for global banks' reluctance to share their currency swap lines with emerging market economies' central banks.

The full copy of the speech was made available on the RBI website on Monday.

"International capital tends to punish monetary and fiscal indiscipline severely," Patel said in his speech.

"Even as some shocks tend to be impervious to fundamentals, economies with sound, prudent, transparent and accountable macro policy frameworks have demonstrated success in containing negative externalities, as well as in restoring normalcy faster," he said, adding that prudent policy frameworks tie down policy actions to final goals.

The governor also suggested that banks adhere to the strict standard imposed by global accounting and regulatory bodies, so that investors have reference to higher quality information in making decisions. While there are challenges in implementing the strict norms under International Financial Reporting Standards (IFRS), India welcomes those norms.

As for stressed assets, "banks generally tend to delay provisioning for bad loans until cyclical downturns have already set in and it is too late, possibly magnifying the impact of the economic cycle on banks' income and capital," Patel said.

Adding: "In such circumstances, providing for and recognising actual and potential loan losses at an earlier stage in the credit cycle could reduce pro-cyclicality and foster financial stability."

Bankers generally are of the opinion that the central bank has been harsh on them with huge provisioning on stressed assets. Banks have also lobbied with the central bank to reduce the weight of such heavy provisioning but Patel's stance on this has remained firm.

As for regulations, the speech says: "Regulation ought to be predictable. A regulation susceptible to forbearing instincts carries the concomitant chance of risk-inducing behaviour by stakeholders."

Patel's direct attack on systemic global banks for harbouring an apathy towards emerging markets have been in the news since the speech was delivered on October 15. "Emerging market economies (EMEs) have undoubtedly benefited from globalisation but they are also more exposed than before to vulnerabilities that come with globalisation," he'd said.

And, that there was "stark asymmetry" in the provision of swap lines by systemic central banks. "In fact, I would go as far as describing the situation as a virtual apartheid, by which systemic central banks protect themselves and their self-interest. Meanwhile, EMEs that are at the receiving end of global financial turbulence are systematically denied access."

Patel called for an end to "this sectarian approach and access to swap lines be equally available".

While EMEs have shown a degree of resilience to the turmoil of recent years, "they are vulnerable to liquidity and bridge financing gaps that are transitory but debilitating". So, more access to swap lines should be extended, so that markets face the turmoil better, Patel argued at Washington.

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