Explained: Sec 7 & why it is being used against RBI

Section 7 of the RBI Act has come into spotlight amid the war between the Central government and the Reserve Bank of India (RBI). The provision in the RBI Act empowers the government to issue directions to the RBI.According to an ET report, the government has invoked Section 7 which has never been used before. Exercising powers under this section, the government has sent several letters to the RBI governor Urjit Patel in recent weeks on issues ranging from liquidity for non-banking financial companies (NBFCs), capital requirement for weak banks and lending to micro, small and medium enterprises (MSMEs) . What is Section 7?The RBI is an entity independent of the government as it takes its own decisions. However, in certain instances, it has to listen to the government. This provision in the RBI Act is contained in its Section 7 which says: (1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest. (2) 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. (3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.] Clearly, the section empowers the government to issue directions in public interest to the central bank, which otherwise does not take orders from the government. Why has the government invoked Section 7?The government and RBI have been at loggerheads over a few issues for some time now. The government believed that easing of lending rules for the banks under the prompt corrective action (PCA) framework could help reduce pressure on MSMEs, ET has reported. However, the regulator stood its ground arguing that such a move would put the clock back and undo clean-up efforts. With the credit markets tightening after the IL&FS default in September, non-banking finance companies lobbied the government for more liquidity. But RBI maintained its position since the banking system did not witness any spike in borrowing costs and the market was just repricing risk in an evolving situation.According to an ET report, a recent court order suggesting that the government consider giving directions to RBI under Section 7 of RBI Act in a case involving independent power producers may have opened up the avenue for the Centre. Power companies had contested a February 12 circular by the banking regulator that said if a borrower misses payment even for a day, it would be considered a defaulter even though the account will remain standard in the books of the bank.Reportedly, the government and the RBI disagree on a large number of important issues such as classification of non-performing assets (NPAs) and setting up of a payments regulator independent of the RBI.Why is Section 7 seen as an extreme measure?This section has never been used in till now. It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 global financial crisis. It is not clear how this Section operates since it has never been used. The aggressive move could scandalise a section of academia and experts, while raising questions about the government’s intentions and the impact on RBI's autonomy. A speech made last week by Viral Acharya, the deputy governor of the RBI, which brought the tensions between the RBI and the government to the fore, might have been provoked by the government's invocation of Section 7. Stressing the importance of the central bank's autonomy, Acharya had sounded a warning to the government — keep your hands off the RBI. Supporting his arguments with illustrations, principles and insights, Acharya made a case of central bank's autonomy for long-term financial stability in the country.

from Economic Times https://ift.tt/2ACkHeU