Will govt invoke Section 7 of RBI Act? All you need to know about this never-before-invoked Act

There have been reports that the government may consider invoking Section 7 of the Reserve Bank of India (RBI) Act allowing it to issue directions to the central bank governor on matters of public interest. However, no government since Independence has invoked Section 7 of the Reserve Bank of India.

Tensions between the finance ministry and the RBI have risen since the bank’s deputy governor Viral Acharya said in a speech on Friday that undermining a central bank’s independence could be “potentially catastrophic”, an indication that the regulator is pushing back hard against government pressure to relax its policies and reduce its powers.

Acharya, who had three of his fellow deputy governors in the audience, also thanked RBI Governor Urjit Patel for his "suggestion to explore this theme for a speech," in a show of unity from an institution typically known for its restraint.

 Will govt invoke Section 7 of RBI Act? All you need to know about this never-before-invoked Act

File image of RBI Governor Urjit Patel. AFP.

Government officials have recently called for the RBI to relax its lending restrictions on some banks, and New Delhi has also been trying to trim the RBI's regulatory powers by setting up a new regulator for the country's payments system.

Union finance minister Arun Jaitley criticised the Reserve Bank of India (RBI) for failing to prevent lending excess in a speech on Tuesday. "The central bank looked the other way when banks gave loans indiscriminately during 2008 to 2014,” Jaitley said while speaking at an event in New Delhi.

A high-level empowered committee will decide on whether to invoke Section 7 of the RBI Act for providing relief to stressed power projects from insolvency proceedings. Economic Affairs Secretary S C Garg told reporters last month that there is a panel headed by the Cabinet Secretary which will take a call on whether to invoke Section 7 of the RBI Act or not.

"The section can be invoked only in exceptional circumstances and the power asset issue is too small to enforce Section 7 of RBI Act," a finance ministry functionary said last month.

What is Section 7 of the RBI Act?

  1. The Section empowers the central government to give directions to the RBI, after consultation with the Governor of the central bank, as it may consider necessary in the public interest. “The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest,” says the Section.
  2.  "Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.  2[(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Gover­nor nominated by him in his behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank."

--With inputs from agencies

Updated Date: Oct 31, 2018 10:14:56 IST