HEADLINES:
December 14 2018
Government may not issue directions to RBI under section 7
19 November 2018

Easing of PCA framework on the cards at board meeting

The Union government may not invoke Section 7 of the RBI Act to issue directions to the central bank, in a bid to reduce the tension between North Block and Mint Road, sources privy to the government’s thinking told The Hindu.

“It is understood that the government has decided that it will not issue directions to the RBI…it is felt that there is no need for escalating the tension,” said a source.

The central board of the RBI will meet on Monday to discuss contentious issues that figured at the last board meeting — economic capital, governance issues of the central bank, boost for the micro, small and medium-sized enterprises and the prompt corrective action (PCA) framework for banks.

The October 23 board meeting failed to reach a consensus on any of the issues and was adjourned after an eight-hour discussion.

 

Though the government had ‘referred’ Section 7 of the RBI Act for ‘consultation’ on these issues, it may refrain from issuing directions as such a move will have wide ramifications.

Section 7 has never been used in the 83-year history of the bank. Invoking it would be interpreted as interference in the central bank’s autonomy. It would also have a bearing on international agencies such as the International Monetary Fund (IMF) that issue ratings for central banks. “These agencies have been raising the issue of Section 7 for sometime now saying that ‘if such a provision exists, then how can RBI be independent?’ However, the RBI has been telling them that though that provision exists, it has never been used,” said an another source.

To meet the government halfway, the RBI may take some steps to boost loans to the MSME sector that had been badly hit by the demonetisation exercise, and which the government is keen to support in an election year. However, it is to be seen how much RBI can do, since the central bank may have some reservations about the sector’s loan absorption capacity at this point in time.

The RBI may also climb down from its position of stringent norms for the PCA framework for banks. As many as 11 public sector banks out of 21 are under PCA, which the government thinks is hampering loan growth. RBI may ease some of the conditions, which may help some lenders come out of PCA.

The RBI and the Centre may also reach an agreement to form two committees, to address the issue of economic capital of the RBI and other governance issues.

“The issue of economic capital is a technical one and conclusion on such an issue cannot be reached in a two-hour board meeting,” said a source.

On the governance issue, it is increasingly felt that the RBI management must be made accountable to the board. The board so far has refrained from taking up specific policy-related issues and its main focus has been to provide a broader vision to the central bank. It has been argued that the central bank has slipped on many issues — such as not anticipating the IL&FS crisis and poor supervision in the case of fraud perpetrated at the Punjab National Bank — and that its management should have been made accountable to the board.

 

 

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