What’s the Beef... Err Problem Between Modi Government and RBI?

When the conflict between the Modi govt and the RBI is looked at point by point, the RBI’s case emerges stronger.

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(This story was first published on 13 November, 2018. It has been republished from The Quint's archives in light of RBI Governor Urjit Patel's resignation on Monday, 10 December.)

So what is the beef – uh, wrong word – I mean conflict/contention between the Modi government and the RBI? Why are both of them at each other’s throats, so publicly, using such vituperative language and tweets? Let’s look at this beef – err, conflict/contention – one slice at a time.

Consensus on a Dividend Policy

Perhaps the RBI should not have surprised the Modi government by slashing the dividend from the budgeted Rs 66,000 cr to Rs 30,000 cr last year. Now they should use this crisis to kill the dividend/surplus friction by agreeing to a “smooth dividend” policy, using the RBI’s stout reserves.

Provisioning on a One-Day Default

The government and several bankers see this requirement as unusually strict and impractical. But for a system which has been so lax and prone to “ever-greening abuse” for decades, perhaps the RBI was justified in using a “shock and awe” tactic to force compliance. Also, the government’s entreaty to exempt power companies from these provisions is contrived and lazy; reforming the power sector is the government’s problem, not the RBI’s.

Regulation of Public Sector Banks (PSBs)

Here too, the RBI has got a strong case. Most of the rot is in the PSBs, which are controlled by the government, with some token presence of RBI nominees on a few committees and boards. Recall how Prime Minister Narendra Modi was vocal about “phone calls from UPA ministers” that had “destroyed PSBs”. Then why is his government preserving such a pernicious structure? Why is Modi not giving RBI unambiguous control of PSBs, in much the same way that private banks have been put under the regulator?


Prompt Corrective Action (PCA)

This is similar to the stress tests that American and European regulators performed on systemically important financial institutions after the 2008 debacle. Under PCA, nearly half the PSBs and one private bank have been stopped from giving new loans until their balance sheets are repaired. This has quarantined almost a fifth of all advances; the government believes this has severely restricted the flow of productive credit and hit growth. But here again, the RBI is on the point. It cannot allow the financial sector to get dislocated by rogue loans from fragile lenders. If anything, the responsibility of recapitalising weak banks has to devolve on the principal shareholder and controller, which is the government!

Payments Regulator

The government wants to create a separate regulator for payments and settlement systems. Quite correctly, the RBI is objecting vehemently to an unconscionable trimming of its remit/turf.

There are several other pinpricks, but all the major flashpoints are listed above. On four out of five, the RBI’s case is stronger.

But I can now detect a “furtive sixth point”, which could end up being the most diabolic, getting inserted into the RBI/government standoff. Let me quote S Gurumurthy, the powerful RSS ideologue who has recently been controversially para-dropped into the RBI’s board, and has stirred things up. He says: “The RBI Act itself says the management of RBI is entrusted to the board, with the Governor and the deputies being mandated to exercise management powers subject to the board’s directions.”

I hope I am wrong, but I see a sinister attempt at a “power creep” here: To enhance the scope of RBI’s board from management/administration to overseeing policy. To reduce the Governor to “just another member” of the RBI Board, a bit like the position of a Managing Director on the board of a public company.

This is blasphemous! It must be fought tooth and nail. The RBI Board is not a policy making/approving entity, which is the responsibility of the Governor and the Monetary Policy Committee, or MPC.

So, Guv’nor Patel, please stand firm. Do engage with the government and accommodate their sensible inputs. But don’t give in. Or quit. This is a moment of institutional truth/sanctity. Hold your ground.

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