RBI snubs Modi government as FM demands Rs 3.6 lakh crore from central bank

Modi Jaitley
Finance Minister Arun Jaitley and Prime Minister Narendra Modi

The major tussle between Reserve bank of India (RBI) and the Modi government includes the proposal of the Finance ministry that has asked the RBI to transfer a surplus of Rs 3.6 lakh crore to the government to recapitalise public sector banks, help them expand their loan book and come out of the Prompt Corrective Action framework..

 The RBI has rejected the government’s proposal as Rs 3.6 lakh crore is more than a third of the total Rs 9.59 lakh crore reserves of the central bank and transferring such a massive amount to the government will adversely impact macro-economic stability.

The government wants RBI to relax rules and move ahead rather than undertaking the much needed reforms in the banking sector.

Arun Jaitley  has suggested that this surplus can be managed jointly by the RBI and the government,according to the report of Indian Express.

 

Amid speculation that the government may have invoked a hitherto unused section to overrule the Reserve Bank of India (RBI) on the pretext of “public interest”, the central bank has shot back with its own definition of “public interest”.

Reserve Bank Deputy Governor N.S. Vishwanathan, in a recent speech, said when a bank is trying to recover loans from borrowers, it is actually trying to get back depositors’ money and it is not a case of “ruthless big bank” versus “hapless borrower”.

“A correct portrayal of the situation would be: public interest (i.e. depositors and taxpayers) versus borrowers’ interest,” Vishwanathan said at XLRI Jamshedpur in a speech on October 29 that was posted on the bank’s website late on Friday.

It is speculated that the government, in certain cases where it differed with the bank, has invoked Section 7 of the RBI Act that empowers the government to consult the RBI Governor and direct the RBI to act on issues that it considers necessary in public interest.

The government believes that, when compared with global central banks, the RBI holds much higher total capital as a percentage of its total assets (at about 28 per cent).

Countries including the US, the UK, Argentina, France, Singapore maintain much lower capital as a percentage of total assets, while the same for countries including Malaysia, Norway and Russia are much higher than India.

One of the vexed issues between the two is related to RBI’s February 12 circular on stressed assets wherein the RBI has ordered banks to initiate bankruptcy proceedings against all large accounts above Rs 2,000 crore if a resolution plan was not met in 180 days.

Here, the government wants some relief for the stressed assets in the power sector, saying it is different from the other sectors as there are several external factors beyond the promoter’s control that turned it into a defaulter and should be given a special consideration.

However, the RBI maintains that the recognition of default or accounting for deterioration in the quality of asset should be independent of the reasons for such default or deterioration.

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