Tussle for power: what’s the RBI-government stand-off?

Tussle for power: what’s the RBI-government stand-off?

News:

1. The article discusses about the simmering tensions between the Reserve Bank of India and the Centre which found spectacular release recently through a public speech by Deputy Governor Viral Acharya.

Important Facts:

1. A certain amount of creative tension is systemically in-built between Reserve Bank of India and Centre given their different perspectives.
2. For example, Centre’s concern is short-term and political while RBI’s concern is long-term and technical.
3. Though such tension is good for the economy, but there are few issues over which both the Centre and RBI are irked over each other.
4. Centre- RBI Conflict:

• Non-Performing Assets: Centre has refused to accept Governor Urjit Patel’s point that the RBI is hobbled by lack of adequate powers in regulating public sector banks to handle the non-performing assets crisis.
• Though the RBI expresses concerns about not having enough powers over PSBs but it does have nominee directors on bank boards which leads physical inspection and financial audits at banks.
• Forex reserve and fiscal deficit: The Centre is eyeing RBI’s burgeoning reserves to bridge its fiscal gap which RBI resents.
• Payments regulator: The Centre is attempting to set up an independent payments regulator, which the RBI sees as encroachment of its jurisdiction.

5. Recent tensions: The government’s intervention through the board sparked recent tensions between RBI and Centre as follows:

• RBI’s recent circular on stressed assets recognition: According to RBI recent circular, if a borrower delayed payment for even one day, he should be dragged to an insolvency court and the asset classified as a non-performing asset (NPA).
• Diluted PCA: The Centre sees the prompt corrective action (PCA) framework by the RBI, which restricts weak banks from lending, as contributing to the liquidity crisis and wants it to be diluted.
• Relaxed lending norms: Centre also wanted special dispensation by the RBI to help non-banking finance companies (NBFCs) apart from relaxed norms for lending to micro, small and medium enterprises.

6.   Way forward:

• The RBI could have heeded the Centre’s signals on easing liquidity through extraordinary measures in addition to routine open market operations to ease the liquidity crises.
• So, the Centre and the central bank must talk behind closed doors and resolve their differences as mature entities in an amicable manner.