A crucial board meeting, of the Reserve Bank of India has begun amid reports that the government has proposed a change in rules that will enable tighter supervision of the country’s central bank.
The move will give supervisory role to the board, which, critics say, is already filled with the government’s men. While the move is seen as heightening tensions between the centre and the bank, sources said there are efforts to find middle ground and it is unlikely that the bank chief Urjit Patel would resign.
Top updates on this big story:
1) The government has recommended that the board of the Reserve Bank which functions in an advisory capacity draft regulations to enable setting up of panels to oversee functions. These functions would include financial stability, monetary-policy transmission and foreign-exchange management. So far, despite the RBI board’s advisory capacity, the bank Governor and his team have been taking their own decisions.
2) The induction of S Gurumurthy, Subhash Chandra Garg and Rajiv Kumar all nominated by the government is seen as an attempt to influence the bank. The members have been vocal about what they said are shortcomings in banking supervision, flow of credit to industry and easing liquidity norms for lenders.
3) The friction between the bank and the government is over three key issues which includes excess reserves in the bank. The RBI has an excess reserve of Rs. 3.6 lakh crore, which, the government says, can be used for development, sources said. The bank contends that keeping extra reserves are essential in view of possible emergencies.
4) The centre is also concerned about the bank’s lending instructions on banks that have massive bad debts and a low capital base. The RBI has barred 11 state-run banks from lending and demanded that they shore up their capital base.
5) On lending to non-banking financial companies and MSME (Micro, Small and Medium Enterprises), the bank contends that there is enough liquidity in the market and defaulting NBFCs are individual cases. The government contends that the RBI should allow banks to lend more to these sectors, especially the MSMEs, which employ 12 crore people and suffered due to demonetisation.
6) On easing of “Prompt Corrective Action” a set of rules that come into action when ailing banks breach regulatory requirements the government maintains that the existing framework is hurting credit flow in the economy but the bank is averse to any change.
7) In a tweet, former Union minister P Chidambaram said, “Government is determined to ‘capture’ RBI in order to gain control over the reserves. The other so-called disagreements are only a smokescreen”.
8) There have been allegations that the government, keen on boosting economy in an election year, had asked the bank to part with a part of its surplus reserves. Mr Chidambaram’s party, the Congress, had said the amount could hover around Rs. 1 lakh crore crore.
9) When the Governor refused, the government took the “unprecedented step of invoking Section 7 of the RBI Act,” said Mr Chidambaram. Section 7 gives the government the power to consult and give instructions to the central bank chief in public interest. Today’s meeting might be aimed at forcing the Governor’s hand through the board, he said.
10) Mr Gurumurthy has denied reports that the government was asking for central bank’s surplus reserves. The Centre, he said, only wants a policy on how much reserves it should hold. Contrary to studies that suggest that reserves be 12 to 18.7 per cent of assets, what the bank has amounts to 27-28 per cent.>