The ongoing confrontation between the government and RBI waded into uncharted territory on Wednesday. Refusing to back off, the government issued a press release stating that the functioning of central bank has to be "guided by public interest and the requirements of the Indian economy".
The RBI Act empowers the government to give directions to the central bank on matters of public interest. According to Section 7, the central government may from time to time give such directions to the RBI as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
However, without acknowledging the notices sent to central bank under Section 7 of the RBI Act, the Finance Ministry said, "For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators... The Government, through these consultations, places its assessment on issues and suggests possible solutions. The Government will continue to do so."
While the government and the RBI have had differences in the past, this is the first time in the Indian history when the executive has asserted itself by invoking Section 7. The government has reportedly used this provision of law to ask the RBI for resolution of various issues.
Differences between the two cropped up over central bank's handling of NPA-laden public sector banks under the prompt corrective action (PCA) framework and ways to resolve bad loans in the power sector. The government also wants the RBI to ease the apparent liquidity squeeze gripping non-banking finance companies (NBFCs).
The Finance Ministry has reportedly written three separate letters in the past few weeks to the RBI on issues ranging from Prompt Corrective Action (PCA) framework to liquidity management and sought consultation under Section 7 of the RBI Act. One of the letters pertained to use of the RBI's capital reserves for providing liquidity to the market and another was for relaxing constraints on banks for loans to small and medium enterprises (SMEs). The government wants RBI to carve out exemption for power companies under the PCA framework that outlines triggers for declaring a loan account as stressed or NPA.
Asked if the government has invoked the never-used provision under Section 7 of the RBI Act, Finance Minister Arun Jaitley said communications and layers of consultations between the government and the RBI haven't ever been disclosed. "Final decisions arrived at are only communicated," he said.
The chasm between the two has been widening ever since RBI issued circular in February which directed banks to acknowledge every loan delayed beyond the 90th day as a non-performing asset (NPA) and provision for it. This alone raised India's NPAs by nearly 25 per cent to over Rs 10 lakh crore.
The turf war came out yet again when the RBI representative put out a dissent note to Inter-Ministerial Committee for finalisation of amendments to the Payment & Settlement Systems Act, 2007. The Committee recommended setting up an independent Payments Regulator outside the ambit of the RBI. RBI saw it as an attack on its powers and an attempt to shrink its authority over the banking space.
The RBI too hasn't budged on the issue. In a fiery speech, RBI Deputy Governor Viral Acharya had warned last week that undermining the central bank's independence could be "potentially catastrophic". Acharya had said governments that did not respect their central banks' independence would sooner or later incur the wrath of financial markets.
BJP MP Subramanian Swamy, who has been vocal in his critique of the government, tweeted if RBI governor resigns then it is a direct consequence of FM blaming him publicly yesterday for NPAs.
If RBI governor resigns then it is a direct consequence of FM blaming him publicly yesterday for NPAs. Patel is a self respecting scholar of economics(Ph.D in Banking from Yale). He should be persuaded to stay.- Subramanian Swamy (@Swamy39) October 31, 2018
Union finance minister P Chidambaram has alleged that the NDA dispensation is "hiding facts" about the economy and is "desperate".
Slamming the Modi-led government in a series of tweets, the senior Congress leader said the governments he was a part of in the past had never used Section 7 of the Reserve Bank of India Act.
"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.
"Obviously, the government has concealed something. The buzz is that government has recently written one or more letters to the RBI. Will government say whether such letters have been written and whether the letters specifically refer to Section 7 of the RBI Act?" he asked.