Ever since the Narendra Modi-led government took over, the Reserve Bank
of India has been in the news. We read about how Raghuram Rajan, the former RBI
governor, had a tough time working with this government convincing and
protecting the interests of the bank and the economy. Small wonder that his
term was not extended. It’s also true that Rajan, too, did not express his
interest in continuing on the post.
After his unhappy exit, everyone presumed that the government would be
extra careful in appointing someone who shared its ideology and toed its line.
Yet, it is surprising that the relations between the apex bank and the
government have been strained to such an extent that the deputy governor had to
speak against the government at a public function. The fact is that the issues
regarding protecting the autonomy of the bank and interference from the
government on policy issues have been simmering for a while.
The frustration came into the open when RBI deputy governor Viral
Acharya spoke at a gathering in Mumbai where he said that “Governments that do
not respect central bank independence will sooner or later incur the wrath of
the financial markets, ignite economic fire and come to rue the day they
undermined an important regulatory institution; their wiser counterparts who
invest in central bank independence will enjoy lower cost of borrowing, the
love of international investors, and longer lifespans.”
These words did not go well with the government. The speech came at a
time when Modi was on a visit to Japan. Instead of deliberating on what went
wrong, the finance minister started a blame game. Jaitley held RBI governor
Urjit Patel responsible for such a speech. The RBI was also blamed for the huge
pile of bad loans without realizing that the apex bank had no role to play in
it. And most of these loans are politically motivated and given to influential
businessmen.
The recent newspaper reports suggest that there would be a war of words
at the next board meeting to be held on November 19. In case the war of words
turns into a heated argument, the government is likely to use its power under
Section 7 of the RBI Act.
A report also said that in case the Section is invoked, four of its 11
independent directors could move a no-confidence motion against Viral Acharya
for publicly expressing his views protesting against government interference.
Who are these independent directors? They find greater solace in their
ideologies than the subject – economics – that they practise. It is no surprise
that the government enjoys a majority in the RBI Board as well when such
nominees or independent directors are appointed only to toe its line. And hence
the differences.
It is being said if the Section is invoked, five representatives of the
RBI, including the governor and two finance secretaries, will have to withdraw
from the board meeting.
The independent directors will then pass resolutions on the contentious
issues of increasing liquidity for non-banking finance companies (NBFCs) and
micro, small and medium enterprises (MSME)s and also about the RBI’s circular
issued on February 12, 2018. Incidentally, this circular has been challenged in
the Allahabad High Court as well.
Now, what is this circular all about? The banks followed several schemes
such as corporate debt restructuring, strategic debt restructuring etc. when a
loan becomes a Non-Performing Asset (NPA) to bail out its customer. The RBI
scrapped all such schemes considering the fact that people at times do not
repay their debt deliberately.
Such schemes help such people in actually shifting their liabilities
from one year to another and so on, taking the banking system for granted,
affecting credit discipline. Not only this, the RBI implemented a one-day
default rule.
Before the circular was issued, the companies had a time period of 90
days before the loan is classified as NPA. The new rule says that the banks
must treat a company as a defaulter even if it misses one day of its repayment
schedule.
The circular was issued considering the volatile situation in the Indian
banking system. Of course, the one-day default rule would affect many genuine
customers as well and needs to be reviewed.
A majority of the independent directors are in favour of easing
liquidity norms for NBFCs and small businesses. However, the issue of a new
economic capital framework, under which the government wants a major chunk of
the reserves from the RBI, may not go well even if Section 7 is invoked.
It is not that the bank and the government have not worked together.
This government and the RBI have collectively adopted certain reforms that had
a positive impact on the Indian economy. The much-desired framework for
monetary policy and an inflation-targeting regime are a case in point. Both
these steps have helped in bringing down inflation from double digits to close
to 4 percent in a span of three years.
In such circumstances, it would be puerile on the part of the government
to invoke Section 7 of the RBI Act when things can be resolved by mutual
understanding and discussion. Invoking the section in the garb of resolving
certain “contentious issues” shows the tendency of the government to act as a
dictator. While Viral Acharya’s speech might have widened the rift between the
bank and the government, using the special power as a tool, would only damage
the reputation of the government when institutions like the International
Monetary Fund (IMF) has been keeping a close eye on these developments.
This is what Gerry Rice, Director of communications, IMF, said, “We’re
monitoring the development on that issue and will continue to do so.” Batting
for the RBI’s independence, he added, “Just stepping back, as a general
principle, and we’ve said this before. I’ve said this before standing here that
we support clear lines of responsibility and accountability... And, the
international best practice is that there should be no government or industry
interference that compromises the independence of the central bank and
financial supervisor.”
In view of the recent developments, it would be wise to have a
constructive discussion in the upcoming board meeting rather than invoking
Section 7, imposing certain decisions, and creating a history of dictatorship
in a country that is said to be the largest democracy of the world.
The government should not use the RBI as its pet like it did while
scraping the 500 and 1000 rupee notes during demonetization. The RBI was not
even consulted at that time and was asked to do the monumental act of squeezing
liquidity in a jiffy and then restoring the status quo in a short span of 50
days. Nevertheless, the apex bank was as confused as any other citizen of this
country, considering the fact that it had to issue 74 notifications to manage
the situation in those 50 days.
The Herculean exercise affected many small businessmen. Many lost their
jobs and lives standing in long queues. Of course, there were many who utilized
the situation to their advantage. There are many who have still not recovered
from one of the biggest shocks that people were subjected to at that time. Be
that as it may, it has set an example of how things may go topsy-turvy if the
government and the regulator act in haste.
The government should remember that while issuing currency notes (except
one–rupee note), the RBI promises the bearer that it will honour its commitment
to pay the bearer money equivalent to its value. It means that the RBI is
equally accountable to the general public as the government is. Undermining one
institution after the other will not only ruin the trust of the general public
but also that of foreign institutional investors, putting the growth trajectory
of the country at risk.
On the other hand, the bank must also understand the government’s
dilemma of creating a business-friendly environment for the small and medium
scale industries which, in turn, would generate revenue and much-needed jobs
for the unemployed youth. Similarly, the government’s demand for transferring
at least one-third of the reserves held by the RBI seems to be unwarranted. It
must understand that reserves act as a cushion against contingencies and
unforeseen circumstances.
Prudence, therefore, lies in sitting across the table and settling all
disputes to the satisfaction of one and all in the best interest of the nation.
(The writer is a company secretary and can be reached
at
jassi.rai@gmail.com
)