Eco adviser wants PCA exit guidelines

Mumbai, Nov. 19: Principal economic advisor Sanjeev Sanyal on Monday said the country cannot have ‘Hotel California’ approach towards banks under the prompt corrective action (PCA) framework, where the exit mechanism for these lenders is undefined.

The Reserve Bank of India’s PCA framework, which intends to nurse financially weak banks back to health, restricts lending and expansion of lenders.

Out of the 21 state-owned banks, 11 are under the PCA framework at present.

“We cannot have a ‘Hotel California’ approach to PCA banks that you can check out anytime but you cannot leave. We have to have a plan on how these institutions will come out of PCA,” Dr Sanyal said, referring to the Hotel California song by America’s famous band Eagles.

The song talks about a person who reaches mystical Hotel California, from where the person is able to check out but unable to exit.

Speaking at the third annual event of Foreign Exchange Dealers’ Association of India (Fedai) here, he said the ultimate aim should be to make sure that credit flow reaches the bottom of the system.

“Because there is no point in having this highly capitalised central bank and highly capitalised banking system, none of which supports the financial requirements lower ring of economy,” the economic advisor added. — PTI

Monetary expansion (printing new currency) is now the order of the day for deficit financing. The IMF too said that it is better than government borrowing from banks, which does not leave enough funds to lend to private sector.

While higher expenditure by the government by pooling money from other sources is understandable, printing currency cannot be a solution. If he thinks the government should ignore fiscal deficit rules, then he should advise the government to scrap the Fiscal Responsibility and Budget Management Act, which was enacted during the NDA-1 regime in 2003, for both the Centre as well as the states.