Economy

Tug-of-war: Here's what caused rift between RBI and govt

Updated : October 31, 2018 01:26 PM IST

RBI’s February 12 circular on stressed assets sparked yet another controversy, when the central bank ordered banks to take all large accounts above Rs 2,000 crore into bankruptcy if a resolution plan was not met in 180 days.

The loan fraud which grappled both the banking regulator as well as the government, resulted in RBI governor Urjit Patel seeking additional powers to oversee public sector banks at par with its peer in private sector.

The beleaguered Infrastructure Leasing & Financial Services’ default issue caused rapid selloff in the market. The RBI, however, did not pay any heed to the request of the government to provide relief to the non-banking financial company (NBFC).

The rift between the Reserve Bank of India (RBI) and the government is seen widening after sources told CNBC-TV18 that the RBI governor Urjit Patel may consider resigning from his post.

But this isn't the first time that the centre and the central bank have traded barbs over policy matters. A significant number of issues came up in 2018 when the RBI and the centre were not on the same page:

Interest Rates

A constant cause of rift between the government and the central bank is that of interest rates. While the government wants to keep them lower, the inflation-focused central bank remains cautious.

In June last year, a controversy erupted when the finance ministry insisted on meeting Monetary Policy Committee of India (MPCI) members before the policy review, reported IndiaToday.

Arvind Subramanian, then chief economic advisor, said the dip in growth and falling inflation warranted substantial monetary policy easing, the report said.

On August 1, the RBI resorted to a back-to-back interest rate hike for the first time in almost five years to curb inflation and pre-empt a rout of the rupee.

February 12 circular

RBI’s February 12 circular on stressed assets sparked yet another controversy. The central bank ordered banks to take all large accounts above Rs 2,000 crore into bankruptcy, if a resolution plan was not met in 180 days.

However, the centre argued that the power sector be given a special consideration due to large number of stressed projects and low investor interest.

SS Mundra, former deputy governor of RBI, said that the central bank was well within its power to issue new stressed asset directions which apply to all sectors. This was on the back of the then amended RBI Act which gave power to RBI to direct banks to initiate bankruptcy proceedings against defaulters, reported BloombergQuint.

The PNB fraud, Nirav Modi and RBI

After the Rs 14,000 crore Punjab National Bank fraud caused by diamantaire Nirav Modi and his uncle Mehul Choksi unfolded, the centre hit out RBI on supervision.

On February 23, Arun Jaitley said, “Regulators ultimately decide the rules of the game and regulators have to have a third eye, which is to be perpetually open. But unfortunately, in the Indian system, we politicians are accountable, the regulators are not.”

Urjit Patel on March 14 replied saying, “There has been the usual blame game, passing of the buck and a tone of honking, mostly short-term and knee-jerk reactions.”

Patel further said that the public sector banks are regulated by the governments and any interference by the central bank to regulate them makes the government uncomfortable as it would mean conceding some of its control over money that has been feeding the economy, IndiaToday reported.

The IL&FS row

The central bank had called for a meeting on September 28 with key shareholders of IL&FS, including Life Insurance Corporation of India (LIC) and State Bank of India, after the company and its subsidiaries defaulted on repayments of various debt instruments, to discuss about finding infusion plans into the company.

However, it cancelled the same saying it wanted details of the plan for future or corrective action which are to be taken by the company.

Ousting of Nachiket Mor

The centre removed Nachiket Mor from the RBI board without any formal intimation. Mor had an additional two years to serve on the board and his removal was seen to be linked to his vocal opposition to the government’s demand for a higher dividend.

“He had completed just a year of his four-year term. He was brought for a second stint because of his expertise in banking areas. But he used to speak up (and) was not exactly the darling of bureaucrats, which could be a reason why his term was cut short,” The Economic Times reported citing sources.

On PCA and NPA norms

The government was also upset with the RBI for not consulting the ministry before finalizing norms for prompt corrective action (PCA) and classification of non-performing assets (NPAs), Business Standard reported.

“The PCA framework was revised and tightened in April 2017, but there was no discussion in any board meeting. The government does not know the rationale behind revising the framework and how the RBI arrived at it. Similarly there was no discussion in the board meeting on the revised NPA framework, a senior unnamed government official told Business Standard.

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Tug-of-war: Here's what caused rift between RBI and govt

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