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C

entral bankers

who leave office

often write memoirs. Few are as

damning of the financial system they

once served as Urjit Patel, the governor of

the Reserve Bank of India (

rbi

) in 2016-18,

and Viral Acharya, its deputy governor in

2017-19, who is now an academic at 

nyu

Stern School of Business. In separate

books, they tell stories of rampant gov-

ernment meddling in the banking sys-

tem. Both stood down before their terms

ended. Their books suggest why.

Mr Patel does not directly address his

departure. But he appears to have

reached breaking point when the govern-

ment of Narendra Modi tried to dilute

new bankruptcy rules that it had once

championed to tackle the problem of

zombie corporations.

In a chapter titled “The Empire Strikes

Back”, he relates how the government

lobbied the 

rbi

to extend repayment

times for companies with 2trn rupees

($27bn) in aggregate exposure. “Instead

of buttressing and future-proofing the

gains thus far”, he writes, the atmosphere

became one of going “easy on the pedal”. 

Mr Patel describes how Indian savers,

to whom he dedicates his book, see their

funds used by government-controlled

banks and other financial institutions

for “vague (and extraneous) objectives”,

such as supporting politically connected

states and companies and, sometimes,

the stockmarket. The distortions un-

dermine banks’ incentives to apply the

scrutiny needed to properly allocate

credit. Price signals become confused;

interest rates for viable private compa-

nies must remain high to offset the ones

that don’t pay. 

Mr Acharya documents other forms of

interference. These include constant

pressure to provide stimulus, raids on

the central bank’s reserves to cover bud-

get deficits, and even threats to invoke a

long-buried clause in the

rbi

’s enabling

legislation, allowing the government to

give directions to the central bank when

it was in “the public interest”. Suggesting

sympathy for Mr Patel, he says the ex-

governor’s battle to defend financial

stability made his job untenable.

Mr Acharya grimly concludes that a

“silent crisis” has been unfolding in

India’s banking system, with borrowers

prevented from defaulting only because

the government is presumed to prop

everything up. That works until the

government’s “solvency is itself consid-

ered to be on the brink”. With the econ-

omy shrinking by 24% in the April-June

quarter, compared with the same period

in 2019, and public finances under pres-

sure, the strains are only likely to get

worse. But at least with these two brave

books the silence has been broken.