Page 39 - Banking Finance March 2019

ARTICLE

of India Act, 1934 was established which says that that the The government's willingness to exercise its authority to
Union Government can "from time to time give such instruct the central bank on policy measures indicates its
directions to the (Central) Bank as it may, after consultation determination to quickly ease the fund crunch that
with the Governor of the Bank, considered necessary in the businesses, especially smaller ones, are facing. Measures to
public interest". revive ailing segments of economy have to be taken by
sensing their pulse, rather than entirely going by macro
It deals with the powers that the Government has to direct numbers that sometimes do not reveal the real picture.
the Reserve Bank of India on policy issues. It works on the
principal that the government initiates a dialogue with the The common thinking in the government is that while it is
Central Bank with a specific mention of the Act and lists the at ease, despite not being politically expedient, with RBI
issues that it would like to discuss and this law empowers sticking to its stance on interest rates as part of its policy in
the Government to give instructions to the Central Bank. It inflation targeting, it has reservations about its going far on
is interesting to note that the RBI board at that time is said matters pertaining to the economy.
to have wanted a provision in the law that the government
has to take responsibility for the consequences of any policy The government is not expected to align its policies to suit
that was forced on the RBI through Section 7, however it the direction of the central bank. The centre does not mind
was not accepted. nudging RBI for course correction, given that unlike other
regulators such as the Securities and Exchange Board of India
Section 7 (2) further reads, "Subject to any such directions, or the Competition Commission of India, the central bank
the general superintendence and direction of the affairs and does not have an appellate authority.
business of the Bank shall be entrusted to a Central Board
of Directors which may exercise all powers and do all acts Reportedly, the government has delegated certain functions
and things which may be exercised or done by the Bank." to the RBI and the latter cannot claim absolute
independence. In short, RBI for its part is right in insisting
Section 7(3) reads, "Save as otherwise provided in that the rule book needs to be adhered to. But the
regulations made by the Central Board, the Governor and government, on the other hand, is equally right in arguing
in his absence the Deputy Governor nominated by him in that institutional freedom of RBI is not absolute-especially
this behalf, shall also have powers of general if it believes that the decision could hurt an economy which
superintendence and direction of the affairs and the business is at a point of inflexion.
of the Bank, and may exercise all powers and do all acts
and things which may be exercised or done by the Bank." However, consequences of such intractable situation and
coming out in public is that Mr Urjit Patel, the then governor,
Insight: has to quit the position of high regard which does not spell
good about the situation and the world as a whole is
The trigger this time was seemingly due to the intransigent watching the development skeptically.
position adopted by the two institutions over three issues. The
well known and widely discussed differences apparently are: Way-out:
i. the disinclination of RBI to dilute the prompt corrective
action(PCA) directive imposed upon the 11 public sector In respect of the point i. regarding PCA on PSU banks, it may
banks . Two of them, Dena Bank and Allahabad Bank, be recalled that as per the statistics, the PSU banks had
are also facing restrictions on expansion. aggregate NPAs of Rs 2.5 lakh cores in 2015 which has
grown to nearly Rs10.00 lakh corers in Mar'2018, a fourfold
ii. the refusal of RBI to relax actions on some major power increase which is alarming to say the least. The then
sector companies i.e. exempting severely indebted Governor RBI is said to have submitted a list of top
power companies from the 12 February 2018 circular defaulting firms to be given to Estimates Committee of
which identified them as bankrupt. Parliament and had also submitted a letter explaining the
iii. The difference in perceptions about the reserves with position. The list contained names of those large corporate
RBI and right of the government to demand transfer who have contributed significantly i.e. more than 70% to
them to the government as demanded to bridge its fiscal the ballooning of NPAs, and have grown many fold in the
deficit gap. next three years.

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