December 22, 2018

India’s Assault on Central Bank Autonomy Is Just Starting

After sending two pesky central bank governors packing in a little over two years, Indian bureaucrats have turned their attention to unwinding the monetary authority’s autonomy.

Their first move, unveiled Thursday, is an innocuous – even laudable – infusion of 410 billion rupees ($5.9 billion) into troubled state-run lenders, bumping up this fiscal year’s outlay for bank recapitalization by 63 percent to 1.06 trillion rupees. The fresh capital partially replaces a shortfall in the  2.11 trillion rupee bank recap announced in October last year. 1

But rather than split hairs, investors should worry about what comes next: a jailbreak for four or five state-run lenders. According to reports in Indian media, Allahabad Bank, Bank of India, Bank of Maharashtra and Corporation Bank are likely to be released from the Reserve Bank of India’s correctional facility for wayward lenders with depleted capital.

It’s way too early. Take Allahabad Bank, one of the four lenders expected to be freed soon from the RBI’s lending curbs. Allahabad has made $730 million in loan-loss provisions so far this fiscal year, running through the entire $700 million of taxpayers’ funds it received as fresh capital during the period. Its capital situation is worse than it was a year ago. And while the government may be right in thinking not much more can go wrong with large corporate debtors (17.5 percent of Allahabad’s loan book is already nonperforming), it doesn’t mean other advances won’t go bad.

Read more at https://www.bloomberg.com/amp/opinion/articles/2018-12-21/india-s-assault-on-central-bank-autonomy-is-just-starting

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