Governance is what governments do. Simply put, it is a set of rules and laws framed by the government to ensure that its objectives are fulfilled. These objectives could be anything ranging from maintaining financial stability to eradicating poverty to creating jobs to ensuring friendly relations with other countries. The government, through various organizations and bodies set up by it, delegates its many functions and ensures that they are carried out smoothly in accordance with how they were designed. However, certain sensitive functions such as maintaining financial stability via the banking system and its duties in relation to currency and inflation control require a certain degree of autonomy from the government in order for it to be free of bias. It is at focal points such as these that the line between government and good governance gets blurred.
Our country’s central bank, the Reserve Bank of India (RBI) was established on 1st April 1935. Though initially privately owned, it was nationalised in 1949 and is fully government owned since then. Its primary functions include issue and printing of currency, acting as a banker to the government and other banks, controlling the flow of credit in the system, custodian of FOREX reserves and keeping a check on inflation among many other functions. Good governance in this sphere dictates autonomy so that there is no conflict of interest between meeting the goals for the country as a whole and its financial well-being.
The recent rift between the government and its banking counterpart (RBI) has once again brought the decades-old concept of autonomy of our central bank to the forefront of this argument. The timing of these concerns being raised is perhaps not all that surprising considering that the general elections are looming around the corner and the ruling party needs all its troops to fall in line. The trouble is, while the BJP is accustomed to having every other body/ organization bend according to its will, the RBI is a different animal to deal with. The central government wants the central bank to tweak a few of its policies that will allow for more liquidity in the system and a greater contribution to its kitty, both of which will aid the ruling party in setting up a bigger corpus to fight the upcoming general election (which as we all know requires massive amounts of moolah). Specifically, the government has demanded relaxation in prompt correction action (PCA) scheme for public sector banks, need for a new capital framework for RBI, addressing liquidity squeeze faced by MSME’s and aligning capital adequacy norms for Indian banks to bring them in line with Basel III framework. The centre believes that the RBI is too conservative in its policy decisions and these changes if implemented, would free up thousands of crores of rupees that could be used elsewhere (we all know where). In addition, the government believes that the central bank has built up an unnecessarily huge amount of reserves, well beyond what is required for efficiently carrying out its activities and has suggested a direct contribution to its election kitty.
The Modi led government, in trying to strong-arm its way into making the central bank accede to its demands, has threatened to use a regulatory weapon at its disposal that hasn’t been used till date since the inception of the RBI. Enter section 7(1) of the Banking Regulation Act 1949, which says the centre can give directions to the central bank in public interest, which have to be adhered to. This relatively straightforward provision can have a devastating impact on the autonomy of the central bank and mere mention of this option being considered sent shock waves through not only the banking community but also the business and political community at large. Further, the central government has appointed S. Gurumurthy, editor of the famous Tamil weekly, Thuglak, and a well-known RSS ideologue to the post of “independent” director. The Congress party rightly criticised this move and made a hue and cry about it. These desperate actions leave a bad taste in the mouth of the ordinary citizen and what the centre is taking lightly is, in trying to make the RBI bend to its whims and fancies, the government is compromising its integrity, which is anyways being questioned recently.
The litany of issues between these two heavyweights finally reached boiling point and culminated into a marathon meeting, which lasted 9 hours ending on Monday late evening. Cooler heads were said to have prevailed and an uneasy truce was reached between the government and its band of boutique bankers. It was decided to set up expert committees to look into easing of PCA framework for some out of 11 affected public sector banks and transfer of appropriate amount of reserves to the government. A transition period was agreed to for relaxation of capital adequacy norms and a scheme for the restructuring of loans for MSME’s up to Rs 25 crores would be considered. The issue of NBFC’s facing liquidity crunch was still not addressed to the satisfaction of the government with the RBI denying the extent of seriousness with which the centre views the problem.
A concrete solution to all the problems may not have been reached, but with this meeting of minds the contentious issue of section 7(1) is finally off the table and the Urjit Patel led central banking institute held its ground and managed to wriggle out of the arm lock the Modi led government was threatening to impose. Autonomy, albeit temporarily, was restored and the sanctity of the 83-year-old banking institution is intact for now