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Monday, November 19, 2018

Regulating the Regulator

By on Monday, November 19, 2018

By Akash Verma; Bangalore
With the passing of the first month of Q-3 FY 2018–19 much had been said and heard between the sovereign Finance Ministry and the Central Bank (i.e Reserve Bank Of India).The tussle, indeed no denial, has been persisting between the two bodies for quite some time now; but the way it had begun into such an ugly cold war face and turned out to be a hard pill that could not be swallowed. The question now to ponder upon is what actually had gone wrong that it led to such a high-level blame game.
RBI though formed under the ambit of the Reserve Bank Of India Act, 1934 has been functioning comprehensively since then, has never given the status of CONSTITUTIONALLY INDEPENDENT authority albeit evolved overtime a fully autonomous bodies subsuming the functionalities of regulating the capital markets & banking sector, chalking down the Monetary Policies, balancing the exchange rate and keeping the inflation under permissible limits.

Finance Minister Arun Jaitley (Left) and RBI Governor Urjit Patel (Right)

On the other spectrum Ministry Of Finance, under the constitution of India, has all the sovereign rights by virtue of being chaired by the elected members unlikely the nominated members of the Central bank, had never failed any chance to up the ante in the matters, falling in the intersection, of the two bodies; specifically concerning the financial and economical parameters of the country.
The tussle between the Ministry of Finance and the RBI had gained momentum when the strict PCA (Prompt Corrective Action) Norms was imposed by the RBI onto the 11 state-owned banks to put a lid on their excessive lending to certain sectors; this lending resulted in a liquidity crunch.

The brat of which is faced by the Central Government because of their political inclinations and the upcoming general election of 2019 by hampering the vote base from the corporate sector.
As a result of this, Union Government wants RBI to ease down the PCA norms citing that the accumulation of the NPA (non-Performing Assests) is due to the latter’s lack of vigilance and the Global Financial Crisis, which results to the growth of NPAs amounting to 10 Trillion Rupees spanning in the post GFC regime (2008–14).
On the other hand RBI via PCA had drafted a very comprehensive frameworks of AQR (Asset Quality Review) and CRILC ( Central Repository of Information on Large Credits), which act a primitive measure of keeping track of the financial health of the banks under consideration, is quite stern on its stance to not dilute the PCA Norms.
Viral V. Acharaya, Deputy Governor RBI
This cold war assumed a shoddy face when Deputy Governor of RBI ,Viral Acharya while delivering A.D Shroff Memorial Lecture in Mumbai on Oct 26 passed a strong statement in public “The risks of undermining the central bank’s independence are potentially catastrophic. Governments that do not respect central bank's independence will, sooner or later, incur the wrath of financial markets, ignite economic fire, and come to rue the day, for they undermined an important regulatory institution”.
The repercussions of which had made the Ministry of Finance to issue letters to the central bank invoking the Section 7 of the RBI Act,1934 which gives authority to the Govt Of India to seek consultation with board of directors of the latter and in the matter when the parties doesn’t reach to a common ground, it will give precedence to the Govt.Of India to act as the proxy to the Central Bank superseding all the regulatory authorities bestowed on the Central bank under the RBI Act.
Bombay Stock Exchange,Mumbai
It is a matter of grave concern to even foresee the implications which if Article 7 of RBI act,1934 exercised by GoI giving directive to RBI, as it will dilute the regulatory authorities of the central bank which will cast a negative shadow on the financial market of the nation and hamper the investor’s confidence. It will be in the interest of the financial stability of the nation that both the parties should converge to a common resolution and act jointly to sail through it amidst the atmosphere of global tension lurking in the background.

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