- Rajesh Tyagi/ Nov 2, 2018
The Central Government has recently invoked Section 7 of the RBI Act of 1934, in a series of letters directing the RBI to act in a particular way. Section 7 empowers the Central Government to issue directions to the RBI and obligates the RBI to comply with them. Section 7 was not invoked even during the default crisis of 1991 or the financial crisis of 2008.
The extraordinary measure has come on the heels of upcoming general elections in 2019.
The pressure upon the Government from the credit dried Non Banking Finance Companies had in fact fetched the imperative for the move.
After the recent IL&FS crisis in September has necessitated the raising of safeguards in credit and recovery regime in banking and non-banking finance, the lending majors have gone dry in no time. Liquidity for NBFCs emerged as the stumbling block in finance business.
Tremendous pressure was thus being exerted upon the Government by the NBFCs and micro, small and medium finance businesses to ease the lending and recovery regime.
Challenging a direction by the RBI of February 12, that stipulates putting the borrower in defaulter list even upon a single day default, several power companies were up in arms. Hearing the petitions filed by the finance magnates, the Court has suggested to the Government to cross over the bars put by RBI by invoking Section 7 of the RBI Act.
The Government wanted the RBI to lower the safeguards on its own. After the RBI refused to comply with the requisition, the Government resorted to invoking the extraordinary powers under Section 7 to ease the credit regime by lowering the safeguards itself.
The conflict between the policy makers at RBI and the Government took a shape of a tussle between Finance Minister Arun Jaitley, who is known for his proximity to the big businesses and the RBI Governor Urjit Patel who has lost favours with ruling core inside the BJP in recent months. The Deputy Governor of RBI, Viral Acharya has recently warned the Government to keep its hands off from the business of RBI. Both Patel and Acharya have threatened to resign refusing to succumb to pressure. Former RBI Governor, Raghuram Rajan, was lately forced to resign from the post for the reasons of interference by the Government in affairs of the RBI.
As the news about Government interference with RBI in favour of easing the norms for lending came out, the Sensex jumped yesterday to make new high over last few weeks. But by the evening, as resistance came from the RBI, market sentiment vanished and the Sensex fell flat.
The Government pressing for restoration of the Prompt Corrective Action (PCA) system to vitalize the finance giants in crisis instantly, did not find favour with the RBI regulator. RBI sees the PCA as source for unbridled corruption and lending insecurity. If this is put back to action, the clean-up move that had started a few weeks ago, would be in peril.
On a number of issues, sharp differences have come up between the Government and the RBI that include the classification of the NPAs above all. Recently, the banking sector was worst hit by NPA crisis, where major public sector banks were found to have immersed deep into the crisis for which no explanation could be offered except the callousness and corruption emerging from a porous credit regime.
Lately, the Government had been mulling over a proposal to set up a payments regulator, independent and outside of the RBI. This is another bone of contention between the two.
Allegations were made against the Prime Minister and Finance Minister for their suspected complacence in providing assistance to the defaulters of public sector banks, from Vijay Mallya to Nirav Modi, who escaped abroad later to evade the repayments of huge loans.
Though they denied their role in the escape, which obviously was not possible without green signal from the top, their insistence upon relaxing the scanner norms, speak a lot about their intentions. Notably, the rumors had surfaced recently that the top companies of Reliance Group headed by Ambanis have gone in big credit defaults. Similarly, the loans extended to Adani Group Companies for Power and Mining contracts in Australia are also understood to have gone bad to create huge NPAs. The Government move will directly help the defaulters to revitalise their nerves and escape the rigors of being declared defaulter.
The immediate purpose of the Government in invoking Section 7 of the RBI Act, is to force the Governor and the Deputy Governor to subject themselves to the majority decisions of the RBI board of governors. Inside the Board, the Government holds a clear majority in favour of easing the lending regime. Resort to Section 7 would open up the broad avenue for clearing of its critical proposals in the upcoming meeting of the RBI Board of Governors, scheduled on Nov 19. Sensing the outcome, Urjit Patel, the present RBI Governor, had recently adjourned a meeting on October 23 thwarting passing of any resolution to boost liquidity and outflows.
The Central Government has recently invoked Section 7 of the RBI Act of 1934, in a series of letters directing the RBI to act in a particular way. Section 7 empowers the Central Government to issue directions to the RBI and obligates the RBI to comply with them. Section 7 was not invoked even during the default crisis of 1991 or the financial crisis of 2008.
The extraordinary measure has come on the heels of upcoming general elections in 2019.
The pressure upon the Government from the credit dried Non Banking Finance Companies had in fact fetched the imperative for the move.
After the recent IL&FS crisis in September has necessitated the raising of safeguards in credit and recovery regime in banking and non-banking finance, the lending majors have gone dry in no time. Liquidity for NBFCs emerged as the stumbling block in finance business.
Tremendous pressure was thus being exerted upon the Government by the NBFCs and micro, small and medium finance businesses to ease the lending and recovery regime.
Challenging a direction by the RBI of February 12, that stipulates putting the borrower in defaulter list even upon a single day default, several power companies were up in arms. Hearing the petitions filed by the finance magnates, the Court has suggested to the Government to cross over the bars put by RBI by invoking Section 7 of the RBI Act.
The Government wanted the RBI to lower the safeguards on its own. After the RBI refused to comply with the requisition, the Government resorted to invoking the extraordinary powers under Section 7 to ease the credit regime by lowering the safeguards itself.
The conflict between the policy makers at RBI and the Government took a shape of a tussle between Finance Minister Arun Jaitley, who is known for his proximity to the big businesses and the RBI Governor Urjit Patel who has lost favours with ruling core inside the BJP in recent months. The Deputy Governor of RBI, Viral Acharya has recently warned the Government to keep its hands off from the business of RBI. Both Patel and Acharya have threatened to resign refusing to succumb to pressure. Former RBI Governor, Raghuram Rajan, was lately forced to resign from the post for the reasons of interference by the Government in affairs of the RBI.
As the news about Government interference with RBI in favour of easing the norms for lending came out, the Sensex jumped yesterday to make new high over last few weeks. But by the evening, as resistance came from the RBI, market sentiment vanished and the Sensex fell flat.
The Government pressing for restoration of the Prompt Corrective Action (PCA) system to vitalize the finance giants in crisis instantly, did not find favour with the RBI regulator. RBI sees the PCA as source for unbridled corruption and lending insecurity. If this is put back to action, the clean-up move that had started a few weeks ago, would be in peril.
On a number of issues, sharp differences have come up between the Government and the RBI that include the classification of the NPAs above all. Recently, the banking sector was worst hit by NPA crisis, where major public sector banks were found to have immersed deep into the crisis for which no explanation could be offered except the callousness and corruption emerging from a porous credit regime.
Lately, the Government had been mulling over a proposal to set up a payments regulator, independent and outside of the RBI. This is another bone of contention between the two.
Allegations were made against the Prime Minister and Finance Minister for their suspected complacence in providing assistance to the defaulters of public sector banks, from Vijay Mallya to Nirav Modi, who escaped abroad later to evade the repayments of huge loans.
Though they denied their role in the escape, which obviously was not possible without green signal from the top, their insistence upon relaxing the scanner norms, speak a lot about their intentions. Notably, the rumors had surfaced recently that the top companies of Reliance Group headed by Ambanis have gone in big credit defaults. Similarly, the loans extended to Adani Group Companies for Power and Mining contracts in Australia are also understood to have gone bad to create huge NPAs. The Government move will directly help the defaulters to revitalise their nerves and escape the rigors of being declared defaulter.
The immediate purpose of the Government in invoking Section 7 of the RBI Act, is to force the Governor and the Deputy Governor to subject themselves to the majority decisions of the RBI board of governors. Inside the Board, the Government holds a clear majority in favour of easing the lending regime. Resort to Section 7 would open up the broad avenue for clearing of its critical proposals in the upcoming meeting of the RBI Board of Governors, scheduled on Nov 19. Sensing the outcome, Urjit Patel, the present RBI Governor, had recently adjourned a meeting on October 23 thwarting passing of any resolution to boost liquidity and outflows.
The reversal of nascent policy regime, put into effect by the RBI for few weeks, would reopen the public finance for insecure lending and high risks that in the recent past have been instrumental in siphoning off the huge chunks of public deposits and investments. The move is just another link in the chain of Modi Government's policy regime to undermine the autonomy of the institutions of bourgeois democracy by subordinating them directly to the will of its cabinet that represents the interests of a financial oligarchy under Adani and Ambani.
Finance Minister Arun Jaitley has boasted recently of India rising high on the 'ease of business' index of the international regulator- IMF. This 'ease of business' for the Corporate is being enforced at the terrible costs of placing the public money at disposal and mercy of the big business and financial giants.
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