Independence of RBI ‘needs to be boosted’

new delhi — The International Monetary Fund on Thursday recommended India strengthen the independence of its central bank and bolster resources for its financial system regulators amid a bad debt pile-up at public banks.

Indian banks have some of the highest levels of debt of any emerging market, with the bulk of bad loans saddled in publicsector lending institutions.

This debt burden means that banks have been stretched too thin to lend for fresh investments, holding back growth in Asia’s third-largest economy.

The IMF — in its annual assessment of the stability of India’s financial system — said these conditions are testing the resilience of banks.

Larger lenders appear sturdy but “the system is subject to considerable vulnerabilities”, the IMF said in its report.

In particular, a “group of public sector banks are highly vulnerable to further declines in asset quality”, it added.

The IMF said despite considerable progress there was scope for improving oversight of the financial sector, including in regards to the independence of Reserve Bank of India (RBI).

“Notably, these include strengthening the RBI’s de jure independence as well as its powers” over the public sector banks and “expanding other financial regulators’ resources”, the IMF said. The government has been urging the central bank to cut interest rates to encourage investment.

The bank has been reluctant to do so, fearing that reducing rates — already at a seven-year low of six per cent — could stoke inflation. —