Urjit Patel resigns: Govt’s push for more power to RBI board was the trigger

By: | Published: December 11, 2018 6:00 AM

In a terse statement issued after the end of market hours, Patel, the 24th RBI governor, who had 268 days to go before his three-year term ends on September 4 2019, cited ‘persons reasons’ for the decision.

RBI governor Urjit Patel and his deputy Viral Acharya (Express file photo)

In a dramatic development that has few precedents, Reserve Bank of India (RBI) governor Urjit Patel stepped down on Monday, heightening the fears that the central bank’s hard-earned reputation is under threat and forcing both the prime minister and the finance minister to quickly say words to the effect ‘not my fault’.

In a terse statement issued after the end of market hours, Patel, the 24th RBI governor, who had 268 days to go before his three-year term ends on September 4 2019, cited ‘persons reasons’ for the decision.

However, given that the ties between the government and the RBI have turned sour and Patel’s resignation came ahead of a crucial RBI board meeting scheduled on December 14, where the government is expected to insist on a review of the RBI’s governance framework in what could potentially harm the regulatory powers of its executive management, it was unmistakable that recent rows claimed his scalp.

In a tweet, prime minister Narendra Modi lauded Patel’s accomplishments, saying Patel “steered the banking system from chaos to order and ensured discipline”, while finance minister Arun Jaitley acknowledged “with deep sense of appreciation” the services rendered by him.

The opposition blamed the government for escalating the strife with the central bank. Former finance minister P Chidambaram said: “Make no mistake, this government’s intention is to make RBI a board-managed company. Government’s immediate agenda is to grab the reserves of the RBI to meet its fiscal deficit target and to get funds for spending in an election year.”

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Prior to Patel, the longest-serving RBI governor after Independence, Benegal Rama Rau (1949-57) had quit after a confrontation with then finance minister TT Krishnamachari.

KR Puri and RN Malhotra were the other two governors who had to resign due to changes in political dispensation then.

Almost right through the current NDA government’s term, there have been rumours that government is not exactly in terms with the RBI for the latter’s perceived regulatory intransigence that crippled banks’ ability to lend and give solid support to the (faltering) economic growth. Patel’s predecessor Raghuram Rajan, it is widely believed, was averse to a second term, but had to leave after his initial three-year term for the absence of any timely assurance of a re-appointment. Rajan said on Monday: “An act of resignation is the ultimate weapon in the government appointee’s portfolio and not used lightly. The government has to deal with Patel’s resignation in a way that credibility of RBI is preserved.”

The RBI-government schism, however, came to the fore when deputy governor Viral Acharya in a speech delivered on October 26 – which he said was prepared in consultation with Patel – used some unusually strong words to decry the government’s perceived incursions into the RBI’s autonomous space. Using the alibi of a court direction in the context of the stressed assets in the power sector, the government had earlier broken convention and invoked the never-used Section 7 of the RBI Act. This kept the RBI under the threat of binding directions on a host of matters, including the prompt corrective action (PCA) framework instituted by the RBI for weak banks (the government wants this to be changed to provide at least some of the 11 PCA banks some leeway to lend) and over its fiat limiting the chances for defaulting power companies to use means outside the ambit of the Insolvency and Bankruptcy Code (IBC) to resolve their stress.

While a revamped RBI board, which included political nominees like S Gurumurthy, was seen extending its domain beyond what has been convention (Gurumurthy has spoken publicly about the RBI not doing enough to ease the credit flows to the MSME sector and the higher capital adequacy norms prescribed by RBI for banks), the government seemed to encourage such moves.

Against the backdrop of the rift, the RBI board met for nine hours on November 19, where the RBI deferred the implementation of the capital conservation buffer norms under its ‘Basel-III-plus’ capital adequacy norms for banks by a year to March 31, 2020 but it managed to retain the capital-to0risky assets ratio or CRAR at 9%, 1 percentage point higher than the Basel norm. The RBI also decided at that meeting to set up an expert committee to review its economic capital framework (ECF) that determines the central bank’s surplus transfers to the government.

Following that board meeting, the RBI took a slew of incremental steps to boost the liquidity of NBFCs.
In an interview with FE later, economic affairs secretary Subhash Chandra Garg said that the government would propose “a discussion on liquidity and how to handle the systemic as well as segment-wise liquidity issues” at the December 14 board meet. He also said another important item for discussion would be RBI’s governance. In what clearly indicated that the government wants the board’s actual powers to be enhanced, he said, “it is the central board of the RBI in which, by law, all powers relating to conducting the business are concentrated”. “The board makes regulations under Section 58, which are approved by the government, which decides what subjects can be retained by the board or given to the governor and other committees,” Garg had said.

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