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Government v/s Governance : The story of RBI & The Centre

Ali Azar

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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

Banking

Government announces ₹48,239 crores recapitalisation plan for 12 PSBs

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Banks

New Delhi | The finance ministry on Wednesday announced to pump in Rs 48,239 crore in 12 public sector banks in this fiscal to help them maintain regulatory capital requirements and finance growth plans.

Financial Services Secretary Rajiv Kumar said that the government will infuse Rs 9,086 crore in Corporation Bank and Rs 6,896 crore in Allahabad Bank — the two “better-performing” banks currently under the Prompt Corrective Action (PCA) supervision of the RBI.

Further, Rs 4,638 crore and Rs 205 crore will be provided to Bank of India and Bank of Maharashtra. These banks have recently come out of the regulatory supervisory framework PCA of the RBI.

Kumar further said Punjab National Bank will get Rs 5,908 crore, Union Bank of India Rs 4,112 crore, Andhra Bank Rs 3,256 crore and Syndicate Bank Rs 1,603 crore.

The government will pump in Rs 12,535 crore in four other banks under PCA — Central Bank of India, United Bank, UCO Bank and Indian Overseas Bank.

The government in December had infused Rs 28,615 crore into seven public sector banks (PSBs) through recapitalisation bonds.

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Banking

₹ 28,000 crore lifeline for Government

News Desk

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Shaktikanta

An increasingly accommodative Reserve Bank of India (RBI) under its new Governor Shaktikanta Das will, after cutting benchmark interest rates to 6.25% earlier this month, transfer an additional ₹ 28,000 crore to the government as interim dividend, after a decision was taken in this regard after its central board met on Monday. This fresh infusion of money will help the government meet its revised fiscal deficit target of 3.4% of GDP for the year 2018-19 amid a short fall in revenue collection.

This is the second consecutive year that the RBI has transferred an interim dividend and this amount is in addition to the ₹ 40,000 crore already transferred.

What is interesting to note is that unlike the government which follows the April to March financial year, the RBI follows a June to July financial year. Therefore, the central bank usually closes its books of accounts in July and transfers surplus earned during the year in the form of dividend in August. Ideally, the RBI should wait for the entire year to conclude before declaring surplus in the form of dividends and this practice of declaring an interim dividend in the middle of the year is not a good one because the future income of the RBI, which is suppose to be for the whole year, is being prepaid, and in case of central banks, things can change suddenly at any point of time and they could be in need of such money.

 

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Banking

Yes Bank Stop Misleading

Akhilesh Bhargava

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All has not been good with Yes Bank and it continues to be not so. It was the refusal of the RBI to not renew the appointment of Rana Kapoor as the CEO of Yes Bank, leading to his ignominious exit, which confirmed our suspicions that all was not well with it. It was always known, though not publicly, that the first Asset Quality Review conducted by the RBI of Yes Bank in 2015, had reported severe accounting, regulatory and disclosure malpractices at Yes Bank, which included the manipulation of its financial statements, huge loans given in violation of its own lending policies and serious regulatory and corporate non compliance. In fact Yes Bank had no serious culture of regulatory compliance, indicating poor or no respect for the regulation and the regulator.

 

In other words the audited financial statements of the Bank were false, or at best a half truth. The primary issue was one of hiding its losses, and thus inflating its profits to the tune of thousands of crores. It under reported its bad loans to the tune of Rs.4176 crores in 2015-16 and Rs.8373 crores in 2016-17. The fact that Yes Bank blatantly manipulated its financial statements year after year, meant that either the RBI went soft on its CEO the leader of these shady practices, and thus did not sack him or that Rana Kapoor was supremely confident of managing and gaming the system, which explains why despite such a serious misconduct, for many years; he was not sacked by the RBI in 2015 itself.

 

A sternly warned and chastised Yes Bank, was however forced to come clean with its books of accounts in 2017-18. It was not because it had mended its ways, but with the dismissal of Rana Kapoor, it was forced to do so, after years of blatant violations and misconduct. In a recent filing with the stock exchanges, Yes Bank triumphantly announced that in its Risk Assessment Report for 2017-18, the RBI observed NIL discrepancies in the bank’s assets clarification income recognition and provisioning. Yes Bank thus implied that the RBI had given it a clean chit and that all is good now and that it has regained regulatory credibility. The market cheered the Yes Bank stock, its share prices went up by 32% in a single day and brokerages and analysts recommended it with a ‘buy’ rating. A stock that was hitherto viewed with suspicion and treated as junk, was overnight now being recommended for investment. Investors rejoiced that the balance sheet of Yes Bank was now squeaky clean and that notion arose due to the misleading letter of Yes Bank to the stock markets.

 

This misleading information by Yes Bank, did not go unnoticed. In a stern letter to Yes Bank, the RBI expressed its displeasure and warned that it will face stringent regulatory action for not just making a confidential report public, but that it also did not reveal the many lapses of Yes Bank and was thus a deliberate attempt to mislead the public. The said report had identified several lapses and regulatory breaches in various areas of the bank’s functioning, which it did not mention in its stock exchange filing. It also said that a nil divergence as tomtommed by Yes Bank is no achievement to be published, but only a compliance, which is a statutory duty of the Bank.

 

It is apparent from RBI’s sharp rap on the knuckles of Yes Bank, that it has given no clean chit to the bank and serious skeletons abound in its cupboard. The dubious conduct of Yes Bank in misleading the public, which started with its false financial statements continues.

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