The wall between the banking regulator and the central government started crumbling fast on October 23 as for the first time the Reserve Bank of India (RBI) Board meeting ended inconclusively and acrimoniously over certain sensitive touch points.

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The RBI officials on the Board and the independent directors nominated by the government could not agree on contentious issues such as easing of credit flow to the micro and small medium enterprises (MSME) and extending liquidity to the non-banking finance companies (NBFCs) at a time when the central bank is on a drive to clean up over Rs 12 lakh crore of stressed assets sitting on the books of commercial banks in India. The other important sore point was RBI’s prompt corrective action (PCA) framework, under which 11 loss-making public sector banks were restrained from their core lending activities.

“The RBI Board meeting has never ended inconclusively. The Board members usually put forth their recommendations and RBI is allowed to function. But now there is too much of government interference through the Board. This is creating an atmosphere where RBI officials are unable to function without freedom,” said an RBI official.

The prevailing friction between the government and RBI led to a flashpoint in the Board meeting with the independent directors seen as usurping the cardinal regulatory powers of the central bank. While RBI wants to stick to its policy of cautious lending, government is insistent on the central bank diluting its stance on the stressed power sector companies and not pushing them for a resolution under the National Company Law Tribunal (NCLT).

Besides, the government wants banks to sanction collateral-free loans to the MSME in 59 minutes. On September 26, finance minister Arun Jaitley launched a portal, to be run by Sidbi,  which would facilitate such loans. With a large number of MSME loans being in the stressed category, the possibility of a framework for such speedy sanctions has not gone down well with RBI.

The inconclusive Board meeting, spread over two days, will now be held on November 19. Though the rift between RBI and the government has gone beyond the cat-and-mouse game, the hope is that there may be room for patchwork and differences between the independent directors and RBI members could be ironed out. Not everyone, though, is convinced that the rift would end abruptly and smoothly. An RBI official said that the induction of independent directors with strong political leanings is blurring the line between the RBI and the government.

“Earlier, the government used to send signals through the bureaucrats to influence RBI. There used to be a buffer zone. Today, people with political leanings are directly on the RBI Board. This is risking erosion of RBI’s right to regulate,” the official said.

After a long interval, the 18-member Board of RBI is completely full, with 10 government-nominated members, four eminent personalities taken from various sectors and four RBI members (RBI governor and three deputy governors). One of the nominations in August this year was S Gurumurthy, who is the convenor of the Swadeshi Jagran Manch.

The stand-off between the central bank and the government is not a healthy sign and could upset the financial markets in India, which are already under pressure from global headwinds. The line of separation between the apex bank and the government provides comfort to foreign institutional investors, an analyst at a broking firm said.

The growing difference between the government and the banking regulator came under public glare when for the first time the RBI published on its website a dissent note, expressing its disagreement with the government in setting up a separate payments regulator. The fragile relationhip reached breaking point when the government asked the RBI to relax lending restrictions imposed on certain weak banks to tackle their non-performing assets (NPAs). Last week, RBI deputy governor Viral Acharya, a close confidante of RBI governor Urjit Patel, said undermining a central bank’s independence could be “potentially catastrophic”.

“The risks of undermining the central bank’s independence are potentially catastrophic,” said Acharya. Rash moves could trigger a “crisis of confidence in capital markets that are tapped by governments and others in the economy,” he said.

During the speech, Acharya had three of his fellow deputy governors in the audience. Reflecting unity among the RBI officials, Acharya thanked Patel for his “suggestion to explore this theme for a speech.”

Source: DNA Money