Government versus RBI

The tug of war for functional autonomy between the central bank and the government of the day is not uncommon in this country. But, the recent spat has assumed unprecedented proportions amidst reports of the National Democratic Alliance government allegedly invoking Section 7 of the Reserve Bank of India (RBI) Act, 1934 in seeking the central bank’s views on issues ranging from liquidity/lending to the non-banking financial corporations (NBFCs), dilution of the Prompt Corrective Actions (PCAs) for three out of the 11 weak public sector banks (PSBs), to RBI’s formulae for calculating its reserves and consequent surplus transfer to the government. Though the statement issued by the Ministry of Finance has made no references to Section 7, there is much hue and cry within the RBI itself about the government’s stance on these issues being seen as impinging on the institution’s autonomy and undermining the authority of its governor.

So, why this ado about Section 7? Given that it provides the central government the power to direct the RBI from time to time (though in consultation with its governor) on matters of public interest, there is growing concern about the already-strained efficiency of the banking institutions. And, rightly so in view of the ongoing banking sector crisis that has shown how state intrusion has impinged on the asset positions of PSBs, be it by encouraging them to lend indiscriminately in the name of infrastructure financing, or give bad loans to big businesses/corporates, which comprise over three-quarters of their non-performing assets (NPA). However, to do so the state never needed Section 7. Just by exercising its shareholder’s rights it could influence political appointments of senior banking officials who would align with the government of the day and contravene the RBI’s regulatory framework. Having met with staunch criticisms for mass mismanagement of public money in the wake of the 2019 elections, the current government is valiantly trying to save its face. ­Invoking Section 7 is a saving grace for several reasons. It can earn the government a clean chit by validating its blaming of the RBI, and in so doing can build up political pressure on the central bank to dilute its regulatory policies in order to favour political clientele, and even stretch such pressure to siphon off the bank’s (internal) reserves over and above the surplus transferable to the government, all for supporting its populist rhetoric.