Urjit Patel’s surprise resignation as the RBI governor seems to have been precipitated by the long-simmering tussle between the government and the central bank over a raft of vexed issues
Urjit Patel’s surprise resignation as the RBI governor seems to have been precipitated by the long-simmering tussle between the government and the central bank over a raft of vexed issues — ranging from the finance ministry’s invocation of the powerful but never-used Section 7 of the RBI Act to force consultations to its demand for a revisit of the regulator’s governance structure at the next board meeting, which was scheduled for December 14. A more belligerent and vocal government nominees of the central board of the RBI in recent months may have signalled an erosion of power of the central bank management to push through policies on contentious matters without resistance — a fact that might have weighed on Patel’s surprise decision as well.
Former RBI governor Raghuram Rajan termed Patel’s resignation “a statement of dissent” that had to be “read between the lines” (Patel has cited “personal reasons” for his decision).
Many feel deputy governor Viral Acharya’s scathing speech in October on any government incursion into the regulator’s autonomous policy space — the rare public outburst by an RBI functionary — was stoked by the finance ministry’s invocation of the Section 7 to force the central bank to give in to its demand.
Sources had earlier said that consultation under this never-used section was sought on issues, including the corrective regime for weak banks, liquidity crunch, capital adequacy norms for banks, credit to micro, small and medium enterprises and even the norms governing the RBI’s surplus transfer to the government.
Although the ministry hasn’t yet given direction to the RBI to abide by its diktat using the Section 7, the invocation of it enables the government to give binding orders to the central bank, if necessary.
What might have acted as the last nail in the coffin is the government’s insistence on changing the way the RBI is governed. Economic affairs secretary Subhash Chandra Garg recently told FE that while the government was committed to RBI’s autonomy, there was a need to ensure it was more responsive and transparent in the manner other regulators are. Governance structures, he said, had evolved for regulators all over the world where public consultations were a regular feature.
Another vexed issue, the economic capital framework (ECF) of the RBI that governs the transfer of its reserves to the government, may have contributed to considerable unease. The government is ostensibly seeking more funds from the RBI. Reportedly, there is again a conflict of opinion over the choice of the head of the panel, which was decided to be set up to look into the ECF (the government wants Bimal Jalan, while RBI wants Rakesh Mohan).
These apart, the high capital-to-risky-assets ratio (CRAR) norm, retained at 9% as of now, has been a bone of contention between the government and the RBI, with the former pushing for changes on grounds that it is a one percentage point higher than the Basel-III requirement. The RBI, however, cautioned against “any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality”. An RBI panel, led by Patel, last week reviewed the performance of 11 of the 21 state-run banks that were under the PCA regime. Sources, however, said it also didn’t revisit the PCA framework, as wanted by the Centre.
While RBI has asserted that there is no systemic liquidity crisis following IL&FS payment defaults, the finance ministry feels there could be a crunch faced by certain non-banking segments. The RBI has also opposed any special window to address the liquidity concerns.