RBI responsible for NPA crisis, Jaitley makes spat more public

Illustration Jayachandran  Mint

Illustration Jayachandran Mint

Sources within the government and the RBI said that, over the last few months, the two sides had held discussions on various issues, including easing of norms under the prompt corrective action framework for weaker banks.

Far-sighted government leaders may be able to reap benefits of convincing voters about the importance of investing in macro-economic stability; for instance, by claiming credit for the long-term nature of financial sector outcomes attained by allowing the central bank autonomy in decision-making and delivery of its core functions.

The autonomy of the Reserve Bank of India (RBI) is "essential" and an accepted governance requirement, the government said on Wednesday in a rare statement issued amid reports of a rift with the central bank.

Finance Minister Arun Jaitley, meanwhile, has blamed the RBI's inability in identifying the problem of NPAs in Indian banks and lack of timely measures for the current crisis-like situation in the banking sector. "There have been talks with the RBI on these issues, but invoking Section 7 (1) is something that has not come up yet but we need to also ensure that industries are not killed", he added. Former Finance Minister Yashwant Sinha tweeted, "If indeed govt has issued directives to the RBI then its governor should resign forthwith". While there are reports suggesting that the Centre has already invoked Section 7 of RBI Act, it still remains unclear on how it will be used.

The letter, according to Firstpost, wanted RBI to carve out exemption for power companies under 12 February circular.

The statement further stated that, "Government of India has never made public the subject matter of those consultations". Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.

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Even thought the controversy around spat between the government and the RBI has been doing rounds for a couple of days now, speculations over RBI governor Urjit Patel's resignations hit the headlines on Wednesday morning.

Patel and his deputy governors are expected to meet top finance ministry officials on Friday.

This did not go down well with the Centre, who said that they were 'upset' that the RBI publicly spoke about the rift.

Acharya's comments gave an indication that the central bank is pushing back hard against government pressure to relax its policies and reduce its powers ahead of a general election due by next May. "We appeal to all right-minded people and experts to speak out and persuade the government to amend, and let RBI do its job in an unfettered way as per statutes, mandates, practices", the letter said.

Section 7 of the RBI Act empowers the government to issue directions necessary for public interest to the RBI from time to time after consultation with the RBI governor.

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