The RBI-Centre conflict: Five things you need to know

The Reserve Bank of India (RBI), in a crucial board meeting on Monday, is expected to take up issues that have triggered a row between the bank and the government.

In a speech last month, RBI Deputy Governor Viral Acharya made a scathing statement about the independence of the central bank and argued that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution”.

In response, Finance Minister Arun Jaitley said that growth must not be throttled by limiting credit availability and liquidity.

The RBI’s central board currently has 18 members, including Governor Urjit Patel and his four deputies as full-time official directors, while the rest have been nominated by the government, including the Economic Affairs and Financial Services Secretaries.

Here are the main points of conflict between the RBI and the Centre:

1. Liquidity crunch: There has been a liquidity crunch in the economy, particularly among non-banking finance companies (NBFCs), following a series of defaults by the Infrastructure Leasing and Financial Services (IL&FS). Though the central bank recently made some relaxations for NBFCs and liberalised overseas borrowing norms for infrastructure companies, the government fears that the steps taken are not adequate and the credit squeeze may spill over to other sectors. The RBI earlier told the government that there was no liquidity crunch at NBFCs and that there was actually some credit growth in the sector. Government sources told IANS that the RBI said that inflation was under control, and that it had taken no measure to tighten liquidity in the system.
2.  Prompt Corrective Action (PCA) framework: Eleven public and one private bank in the country have been placed under what is called a PCA framework – rules the RBI puts in place for weaker banks – that bars lending, among other things, by these banks until they strengthen their capital base. The RBI board is expected to discuss issues related to making relaxations to the PCA framework to clean up the balance sheet of banks burdened with NPAs.
3. RBI reserves: The government has argued that the RBI has more assets than it requires. RBI board member S Gurumurthy earlier said the government was not asking for the central bank’s surplus reserves but only wanted formulation of a policy as to how much reserves it must have. RBI’s reserves are at 26% of total assets, whereas globally it is maintained closer to 16%. The government says that the excess could be used for development.
4. Section 7 of the RBI Act: The meeting is being held amid growing tension between the Centre and the RBI after the Finance Ministry recently sought discussions under the never-used-before Section 7 of the RBI Act, under which the Centre can hold a consultation with the RBI Governor and issue directions in matters of public interest.
5. MSMEs: The government wants the central bank to lend more to micro, small and medium enterprises (MSME), which have been facing issues with liquidity and were hit by demonetisation and the implementation of GST.

With IANS inputs