Rbi Vs Government: Centre Steps Back For Fear Of Governor Urjit Patel Quitting, No Section 7 Directive Yet

Though no Section 7 directive yet, govt began discussions under this on stressed power assets, the PCA framework and RBI parting with capital .
The tensions between the government and the Reserve Bank of India (RBI) came to a head after the former invoked the powerful-but-never-used Section 7 of the RBI Act to initiate consultations with the central bank through three letters on a range of contentious issues, including the corrective regime for weak banks, liquidity crunch, capital adequacy norms for banks and credit to micro, small and medium enterprises (MSME).

In its reply, the RBI stuck to its stance, without promising changes that the government may have wanted, a source aware of the development told FE.
However, the finance ministry hasn’t yet given direction to the RBI to abide by its diktat using the Section 7 that gives powers to the government to seek consultations with the central bank as well as give it binding orders, if necessary, in public interest, said the source.

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Nevertheless, the invocation of the section — which was never used even in times of wars or balance of payment and sub-prime crises — may have added to the RBI’s discomfiture and triggered deputy governor Viral Acharya’s stern warning last week against “potentially catastrophic” consequences of any government incursion into the central bank’s autonomous regulatory space. The Section 7 has three parts, of which the first one is the most relevant here. It says: “The central government may from time to time give such directions to the Bank (RBI) as it may, after consultation with the governor of the bank, consider necessary in the public interest.”

While talks between the finance ministry and the RBI usually take place without resorting to Section 7, the invocation of this section for consultations is important, as it leaves the scope for the government to issue directions as it deems fit to the central bank, another source explained.

The second part of the section says: “Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a central board of directors, which may exercise all powers and do all acts and things which may be exercised or done by the Bank.”

One of the sources said the government might have drawn inspiration for using the Section 7 from a recent judgment of the Allahabad High Court, when the latter was hearing a case filed by power producers against the RBI’s February circular that mandates early detection and time-bound resolution of stressed assets.

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The HC had asked the finance ministry to hold consultations with the RBI within 15 days, under Section 7 of the RBI Act 1934, and see if the issue could be resolved. But in its order on August 28, the HC had also said: “The central government, however, is not expected to issue any directions, as contemplated under Section 7(1), indiscriminately or randomly. Such directions are possible when there exists sufficient material in support.”

Sources said the department of economic affairs has written the three letters to the central bank in recent weeks, invoking the section.In its reply, the RBI has stated its position on the need to retain the “stringent” prompt corrective action (PCA) framework for stressed banks. It is also learnt to have said that there is no liquidity crunch. Similarly, the finance ministry and the central bank have differed on capital adequacy norms for banks.

The RBI has mandated that banks maintain capital-to-risky asset ratio (CRAR), including capital-conservation buffer, at 11.5% — 1 percentage point higher than Basel norms. Similarly, the common equity tier (CET)-1 of banks is required to be at least 5.5% of its risk-weighted assets — again 1 percentage point higher than the global norms. The ministry wants the stipulation aligned with the international practices as well, so that banks are able to lend more and spur economic growth.

Similar provisions that give the government rare powers also exist in laws that govern other regulators, including Insurance Regulatory and Development Authority.

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