RBI Vs Government

20 Nov

BE/RBI NOTE/50/2018

RBI

Issues

The fight between the RBI and the Government which was developing since February this year has come to the forefront now.
It was on on October 26, that the RBI Deputy Governor Viral Acharya practically accused the Government of interference in the Central Bank’s working
In turn the Government brought back the blame on RBI for the unmanageable Stressed Assets in Banks.
- Two years down the line, Urjit Patel’s defence of the Government has apparently turned into defiance of the Government. Urjit Patel was considered the Government’s blue-eyed boy in the RBI as an answer to his rock star predecessor, who stonewalled all attempts of the Government to get the bank regulator toe its line.
- The Government and the RBI are speaking alien languages on the state and direction of Indian economy. On October 26, RBI deputy governor Viral Acharya virtually accused the Government of interfering with the working of the central bank.
- On the other hand, Union Finance Minister Arun Jaitely blamed the RBI for unmanageable figures of stressed assets saying that it failed to check indiscriminate lending between 2008 and 2014 causing NPA crisis in the banking industry.

Non Performing Assets:

The Central Bank issued a Non-negotiable bad loan notification. Thus, RBI came out with new norms of loan restructuring.
A 180 days deadline was set afresh by RBI for declaring a loan as AN NPA.
This notification said that after 180 days, any Stressed Account must be referred to the bankruptcy courts for settlement.
This new regulation stipulated by RBI was considered as very harsh by the Government. It felt this had led the public sector banks in the red.
Currently out of the total PSU banks, 21 are under RBI watch-list. RBI has forbidden Dena Bank and Allahabad Bank from further expansion of the business.
Let apart, the other issues are creeped up in between which were like:
PNB fraud of nearly Rs 14,000 crore of Businessmen Nirav Modi and Mehul Choksi are accused of engineering the fraud involving several banks. The Government openly criticised the RBI for the PNB scam.
Another case concerning former Andhra Bank director, who was arrested by Enforcement Directorate, in connection to an alleged Rs 5 billion bank fraud case, involving a Gujarat-based pharma firm.
The Promoter of Rotomac pen Vikram Kothari, allegedly fraudulently cheated Rs. 3,695 crore with seven banks. Kothari has misappropriated loans worth Rs 2,919 crore from 7 banks and the total outstanding amount, including interest on him, is Rs. 3,695 crore. The CBI arrested the Managing Director of Rotomac Global Pvt Ltd Vikram Kothari.
The CBI booked a computer manufacturer R P Info Systems and its directors for allegedly cheating a consortium of 9 banks with amount of 515.15 crore. This company has used fraud documents to take the loan. CBI raided the offices of the company in Kolkata and other places on February 28, 2018.
The Government said that the RBI was negligent in supervising the banking operations that resulted in PNB scam. RBI governor Urjit Patel promptly refuted the charge and said that the Government shields the PSU banks.
RBI Governor sought more powers to oversee public sector banks. He said the RBI has more powers over the private sector banks.

Interest Rates

The Government wants the RBI to cut interest rates. This the Government feels, would provide the much-needed impetus to the Indian economy. However, RBI has a different version for this.
The RBI refused to bring down key interest rates, instead it raised the rates, much to the Government’s embarrassment. Hence the Government feels that RBI is following a policy that goes against that of the Finance Ministry.
Similarly in case of non-banking financial companies (NBFCs), th differences became more conspicuous in the after results of the Infrastructure Leasing and Financial Services (IL&FS) crisis.
IL&FS defaulted on repayments. The Government wanted the RBI to bail out IL&FS. But RBI refused do so and also objected to Government’s persistent demand for greater dividend from banks.

Personality-based confrontations:

Two incidents are unique:
Nachiket Mor was removed from the RBI board two years ahead of his tenure without being informed. Nachiket Mor was a known critic of Government’s demand for higher dividend from banks. The RBI leadership viewed his sacking as silencing of an opposing voice in the central bank.
Secondly, RSS-affiliate Swadeshi Jagran Manch’s co-convener S. Gurumurthy was appointed as a Director on the RBI board recently. Though, RBI did not oppose the Government’s move, it is learnt that the top brass of the Central Bank are not happy with this decision.
Gurumurthy was a bitter critic of the RBI under Raghuram Rajan. In one of the tweets, Gurumurthy said that the RBI had lost the capacity to think about Indian economy. Also, it is learned he was the key man to moot the demonetization idea to the Modi Government.
During a lecture, Viral Acharya, the Deputy Governor, reiterated that undermining RBI’s independence is akin to committing a SELF GOAL by the Government.
Interestingly, brokerage firm Morgan Stanley has said that the RBI enjoys more freedom today than ever. It felt that RBI is more independent today than in the past.