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 email@example.com(Published on 19th November 2018, Volume XXX, Issue 47)