Amidst the logjam between the government and RBI, Centre hint towards the invocation of Section 7 of the Reserve Bank of India (RBI) Act. In recent weeks, the government has sent several letters to the RBI governor Urjit Patel on the matter. The letters discussed lending rules for non-banking financial companies (NBFCs), capital requirement for weak banks and lending to micro, small and medium enterprises (MSMEs).
The Finance Ministry on Wednesday acknowledged the autonomy of the regulatory body in an official statement. However, no clear reference to the issuance of any directives to the bank under Section 7 of the RBI Act has been made.
The central government has written to the RBI seeking consultations on major regulatory issues under Section 7 of the RBI Act, reports said. The provision empowers the government to issue directions to the RBI.
“The autonomy for Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement,” a statement from the Department of Economic Affairs, Finance Ministry said.
This section has never been used in till date, not even in 1991 or 2008 global financial crisis. There is no clarity on the operations of this Section as it has never been implemented.
“If, as reported, Government has invoked Section 7 of the RBI Act and issued unprecedented directions’ to the RBI, I am afraid there will be more bad news today,” P Chidambaram, Former Union Minister reacted on Twitter. Chidambaram also questioned the need to invoke the provision Section 7 now.
We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013. What is the need to invoke the provision now? It shows that government is hiding facts about the economy and is desperate
? P. Chidambaram (@PChidambaram_IN) October 31, 2018
What is Section 7?
The RBI is an autonomous entity. However, in specific cases, the government enjoys a certain level of power. Section 7 of RBI Act is a similar provision which says, in public interest, it empowers government to issue directions to the central bank after consultation with the Governor of the Bank.
The sub-section further reads, “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.”
Section 7(3) reads,”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.”
Why is it in the spotlight?
The government believes that this provision can be used to ease lending rules for the banks and reduce pressure on MSMEs. Finance Minister Arun Jaitley had accused the RBI for bad loan crisis and incompetence on Tuesday.
However, RBI stood its ground asserting that the entire framework of the institution will be destroyed if this comes into action. More liquidity means more power in the hands of non-banking finance companies and less money in the loop of banking system.
Earlier this month, in his speech Viral Acharya, deputy governor of RBI, warned the government not to intervene in the autonomous body’s functioning. He also asserted the importance of the central bank’s autonomy for the long-term financial stability in the country.
Governor Patel is also considering resigning after the rift with the Centre.