Will Govt use special powers to issue orders to RBI

TN Ashok

When it comes to financial history or monetary economics of any country, even in a country as mighty as the United States, the torchbearer of democracy, there is always a rift between the Federal Bank and the government or  the treasury department.

So,  India is no exception when the RBI Governor Urjit Patel and his deputy Viral Acharya spar with the Union Finance Minister Arun Jaitley, a leading lawyer on constitutional matters. Even Alan Greenspan, considered as one of the best treasury secretaries and head of the Federal Reserve in the United States, has had a spat with the US Presidents of his time, who had unbridled powers to curb him. But he always at the end of the day , though at times he lost out.

So what is the ruckus all about? More than six to seven hours of discussions in closed doors the Finance Minister had with the RBI Governor Urjit Patel, who flew down from Mumbai, to discuss and resolve the differences on an array of issues , presumably not yielding concrete results, as each side seemed  unrelenting,  even as endless rounds of coffee raised  their adrenaline in their blood with caffeine.

Let’s look at the dispute. Tensions always existed between the federal Reserve Bank and the Finance Ministry and this time around Deputy Governor Viral Acharya, as his name suggests, went viral and ignited passions in the south block mandarins with basic questions such as the independence of the central bank, long-term effect on institutions if government keeps needling them, whether democracy is strengthened if power is distributed across institutions. Issues important enough to be debated at length.


The moot question here is – Is the RBI and Finance Minister spat, which is  out in the open in public domain, is it is cause for worry for managing monetary economics ( money supply and controlling inflation ), a domain best handled by the RBI,  an autonomous institution under the constitution.


What does the government want? Does it want the restrictions for banks under the Prompt Corrective Action (PCA) mechanism to be relaxed? Is it egging banks to lend more because economic growth is slowing down and there is virtually no job creation?  The spat has caught international attention, so much so, that a foreign agency such as Bloomberg has reported that this could be so  if the government is worried about growth. But GDP growth was an impressive 8.2% in the June 2018 quarter and it’s likely to be around 7.4% or so this fiscal year. “We are the world’s fastest-growing large economy, “Finance ministry mandarins have constantly been repeating this rhetoric through media releases.”


Official figures show that in the period ending October 12, this year, the rise in non-food credit by scheduled commercial banks was 14.5% year-on-year. With consumer price inflation below 4%, that’s a real rate of growth of over 10% in bank credit. So if these figure are more than satisfactory, why is the finance ministry demanding from the federal bank that lending be more by commercial banks? Somehow it has got into the mindset of government officials that that most of the growth comes from personal loans and if more credit is channelled to the manufacturing industry, growths will pickup.

Despite all claims by government that jobs are being created under various government schemes, under this yojana or that yojana, its conscience pricks that actually not enough jobs are being created. Small industries are still struggling from the double whammy of  demonetization and the Goods & Services Tax (GST) and state-run banks don’t want to hear their pleas. Banks are flushed with money after demonetisation , but still there is a reluctance to lend, probably because of the fears stalking most PSUs with maverick and financial buccaneers such as Vijay Mallya and Nirav Modi,  either not returning loans of banks or siphoned off huge funds from banks and deployed in unyielding sectors,  such as the real estate,  which has collapsed since 2014,  with the governments attack on corruption and black money. Real estate runs on floating currency and not on bank loans so much.

Government’s angst on the lending front and nudging the federal bank to the brink stems from internal political compulsions and pressures that , since all is not well on the economic front , it is imperative the federal bank loosen its purse strings as otherwise cash less economy could seriously  impact election verdict in May 2019.

Another issue is reportedly the dividend that RBI pays to the
government. The government has maintained it can meet the fiscal deficit targets pegged at between 3 and 4%. The Finance Minister may also be concerned that budgetary deficit may overshoot as many economists prophecy.

“Then there is the matter of the non-banking finance companies (NBFCs)and the liquidity crunch emanating from the IL&FS debacle. Why is the government’s assessment of the situation different from that of the RBI? That raises the unsettling question: is the matter far more serious and does the government know something the market doesn’t? “Bloomberg asks in its report.

The constant battle between the RBI and Finance Ministry has paradoxically brought the populist Modi government and the bank quite often on opposing sides this year. The growing rift that failed to resolve at yesterdays RBI-FM meet, have been in the making for many months, a leading TV channel reports. In the latest move, the Reserve Bank of India made its disagreement with authorities public in a hard-hitting speech by Deputy Governor Viral Acharya Friday — in which he said he had the backing of Governor Urjit Patel — defending the central bank’s independence. Failure to do so would “incur the wrath of financial markets,” he had warned sending ripples down the south block and the bourses in Mumbai. But the government has not officially responded to these red flags being flagged by the federal bank. India is not a banana republic as in central America or south America and it has sufficient safeguards built into its financial system , if un wound , could send its economy into a tail spin, some economists warn. This is what saved it from the 2008 global meltdown.

Here are some of the top reasons that have driven a wedge between the two premier institutions that budget the countrys demand and supply cycle : RBI and The Finance Ministry. Weak Banks: RBI in its offensive to clean up mainly PSU banks balance sheets literally ring-fenced weak state-run banks.

Presently, a total of 12 banks — 11 in the public sector and one in the private sector– are under the so-called Prompt Corrective Action (PCA) framework that places curbs on lending, expanding branch network and dividend distribution, banking circles say. The government wants some of these strictures to be eased so that banks can kick start lending and support growth. Acharya said the restrictions were “indeed the required medicine to prevent further haemorrhaging of their balance sheets.” Some of these weak banks are slowly being nursed to health, he claimed.

Handling Fragile Banks:  India is delivering a bitter pill to its weakest state-run banks.  Stressed assets are gross non-performing assets plus restructured standard loans. The ratio is a percentage of gross advances, agency reports say adding : Bad Loans:  The RBI has been waging a multi-year campaign to get state lenders to recognize soured loans and has been leaning on bank managers to cut off credit to “wilful defaulters” -— borrowers who have stopped servicing their debt even though they have the ability to pay ( Say Vijay Mallya whose liquor business thrives while his flying business is bankrupt). Mallya maintains they are different businesses and there should be no cross over management as it would bring down a profit making business. He may be right but banks cannot buy this argument.

As part of that attempt, the RBI earlier this year introduced new rules forcing lenders to declare a delinquent borrower even if payments were overdue by a day. That was aimed at easing mounting bad loans, particularly from the power sector. Government officials along with those from the power sector have been lobbying the central bank to ease those norms, but with little success. Last month, the Supreme Court ordered lenders to temporarily halt the start of bankruptcy proceedings against power producers considered delinquent borrowers, agency reports claim.

In the meantime market jittery and rupee has lost in view of RBI and F.M differences.

T N Ashok is a Corporate Consultant, Resident Editor and Writer of Economic Affairs.

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