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Bloomberg
Urjit Patel resigned as governor of India’s central bank amid growing differences with the government on addressing issues ranging from problems at the country’s lenders to utilisation of capital reserves.
“On account of personal reasons, I have decided to step down from my current position effective immediately,†Patel said in a statement posted on the central bank’s website.
Patel, who succeeded Raghuram Rajan in September 2016 for a three-year term, has been at loggerheads with the finance ministry on matters including the banking crisis and interest rates. The differences came out in the open when Deputy Governor Viral Acharya, in a hard-hitting speech in October, defended the central bank’s
independence and sought more freedom in supervising state-run lenders.
Oxford-trained Patel, who has tried to stay away from the spotlight, was initially seen playing along with Prime Minister Narendra Modi after he backed a ban on high-value currency notes in November 2016. Since then, he has waged a war to get India’s struggling banking system in order and punish errant borrowers who have stopped servicing their debt even though they have the ability to pay.
His exit comes at a time when India, which is closing in on Italy to become home to banks with the worst bad-loan ratio among major economies, is delivering a bitter pill to
resuscitate its banking sector.
BACKFIRE
The Indian central bank is not alone in facing political heat with the challenges to the independence of monetary policy makers a theme of 2018. The Federal Reserve has weathered criticism from US President Donald Trump, while counterparts in New Zealand and the UK have also been pressured by policy makers.
The risk is that political pressure could backfire. A study in the 1990s by economists Alberto Alesina and Lawrence Summers concluded that independent central banks were better at controlling inflation without damaging output or employment.
Markets may also push up long-term borrowing costs if they fear central banks are
taking their eye off inflation.
Earlier this year, the RBI introduced new rules forcing lenders to declare a delinquent borrower even if payments were overdue by a day. That was aimed at easing mounting bad loans, particularly from the power sector.
Patel also moved in to ring-fence weak state-run banks. Currently, a total of 12 banks —11 in the public sector and one in the private sector — are under the so-called prompt corrective action framework that places curbs on lending, expanding branch network and dividend distribution.