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Government extends olive branch to RBI, but not before it ups ante and flexes its muscles citing a never-used law

Efforts are on to contain the fight before it turns macabre as speculations are rife that RBI governor Urjit Patel, an NDA pick, may resign. With the two giants managing the Indian economy — the Central government and the Reserve Bank of India — at loggerheads with each other, it is the economy that is under stress. And the most contentious issue of this fight is the reference to Section 7 (1) of the Reserve Bank of India Act under which the government shot off at least three letters on different issues to the Central bank. This act empowers the government to issue any direction to the Central bank governor on matters of public interest.

Although the government in a bid to bring down the mounting tensions issued a statement saying that government has "nurtured and respected" autonomy of the Central bank and has been holding extensive consultations with it on many issues, the anxiety in the air was palpable.

Reserve Bank of India. Reuters

Reserve Bank of India. Reuters

Top sources said three consultations were sent to the RBI in August, September and in the first week of October by the finance ministry. Three issues were raised through these consultations -- Issues of the power sector, Prompt Corrective Action (PCA) and Medium and Small Scale Enterprises (MSME). Sources said after the consultation, RBI has to take directions from the government in 'Public interest'. They also said RBI stand on technical issues is undisputed.

"One needs to see who are the stakeholders in these consultations sent to RBI. First, it is private power companies, second 11 banks affected by PCA and the third is only moderate entrepreneurs. So even if the government cite public interest, it can only argue about MSME and not the other two. RBI is perfectly fine as far as its stand regarding monetary policies is concerned," sources said.

Although the government has issued a press statement on Wednesday afternoon in a bid to clarify controversy surrounding invocation of section 7, sources said the tussle has been going on for quite some time and it all started with 'forced demonetisation' by the government in 2016. Subsequently, the RBI was unhappy with FRDI bill and the government stand on asset quality rating (AQR).

The Financial Resolution and Deposit Insurance Bill (FRDI Bill) was introduced in the Lok Sabha on 10 August last year, and thereafter, it was referred to a joint committee of Parliament for scrutiny. However, it was withdrawn on 7 August this year by the government.

"The stakeholders including public have raised apprehensions relating to the provisions of the FRDI Bill, like the use of bail-in instrument to resolve a failing bank, the adequacy of deposit insurance cover and the felt need to revive the insurance limits substantially, and application of resolution framework for public sector banks.

"Resolution of these issues would require a comprehensive examination and reconsideration. It is, therefore, appropriate that the bill may be withdrawn," then finance minister Piyush Goyal had informed the joint committee, which tabled its report on the controversial bill on 7 August 2018 in Parliament.

According to Investopedia: "An asset quality rating is a review or evaluation assessing the credit risk associated with a particular asset. These assets usually require interest payments — such as loans and investment portfolios. How effective management is in controlling and monitoring credit risk can also have an effect on the what kind of credit rating can be achieved. Asset quality is an important determinant of risk, as such, analysts go to great lengths to accurately estimate asset quality and its impact on the overall condition of a business, bank or portfolio."

Top sources indicated that the Central government played hardball and made things difficult for the Central bank.

"The government criticised RBI on the aggressive lending by banks and NPAs but actually, the regulator had little space to do what the government wanted in public interest. In lending cases, government stand is contradictory. In one hand it is criticising RBI for NPAs and on the other accusing it of a liquidity squeeze. There are so many issues that have been troubling the RBI. It is true reform is needed for RBI in governance issue for human resources, recruitments etc. Otherwise, they are operating under a standard global norm," informed government sources said.

On Tuesday, finance minister Arun Jaitley criticised the RBI for failing to check indiscriminate lending during 2008 and 2014 that has led to the present bad loan or NPA crisis in the banking industry.

"You see (between) 2008 to 2014, after the global economic crisis, to keep the economy artificially going, banks were told open your doors and lend indiscriminately," Jaitley said at India Leadership Summit organised by US-India Strategic Partnership Forum. "The central bank looked the other way, there was indiscriminate lending," he said.

The government of the day, he said, was pushing banks to lend which resulted in credit growth in a year shooting up to 31 percent from the normal average of 14 percent.

RBI deputy governor Viral V Acharya in a speech on Friday had stated that undermining the Central bank's independence could be "potentially catastrophic". This was seen as a veiled reference to RBI pushing back hard against government pressure to relax its policies and reduce its powers. Delivering the AD Shroff Memorial Lecture, Acharya had called for greater powers for RBI to regulate public sector banks as it seeks to clean up the banking system. This independence, he said, was necessary to secure greater financial and macroeconomic stability.

The government statement on Wednesday although seemed like an attempt to douse the flames of disagreement between itself and RBI that pretty much happened due to its own doing.

"The autonomy for the Central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Government of India has nurtured and respected this," it said in the statement. Both the government and RBI, in their functioning, have to be guided by public interest and the requirement of the Indian economy, it said.

"For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time."

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However, the statement did not mention about the government citing the never-before-used power of issuing directions under the Act to RBI governor to seek a resolution to differences with the Central bank.

"The government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated," the statement said. "The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so," it added.

Slamming the government for citing a never-used clause of the RBI Act, former Union finance minister P Chidambaram on Wednesday alleged that the BJP dispensation is "hiding facts" about the economy and is "desperate". The senior Congress leader said that the governments he was a part of in the past had never used Section 7 of the Reserve Bank of India Act of 1934, under which a direct order can be issued by the government to the central bank to carry out its wishes in "public interest".

"If, as reported, Government has invoked Section 7 of the RBI Act and issued unprecedented 'directions' to the RBI, I am afraid there will be more bad news today.

"We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013. What is the need to invoke the provision now? It shows that government is hiding facts about the economy and is desperate (sic)," he said in a series of tweets.

The former finance minister also attacked the government after it issued a statement to clarify things that are going on between itself and the RBI.

With inputs from PTI


Updated Date: Nov 26, 2018 18:06 PM

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