Govt seeks consultation with RBI on some issues under Sec 7; says RBI autonomy essential

NEW DELHI, Oct 31: The Government has for the first time ever used a provision of law to ask the RBI for resolution of differences between them on stressed loans in power sector and other issues, sources privy to the development said.
Without acknowledging the notices sent to RBI under Section 7 of the RBI Act, the Finance Ministry in a statement said autonomy was “essential” but its functioning must be guided by public interest and needs of the economy.
Amid a standoff between the ministry and RBI over the central bank’s handling of weak public sector banks, tight liquidity in the market and ways of resolving bad loans in the power sector, unconfirmed reports claimed RBI Governor Urjit Patel was considering stepping down if the government were to issue an unprecedented direction.
“The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this,” the ministry said in a brief statement.
Sources in the know of the development said the government has sent at least three letters on different issues under Section 7 (1) of the RBI Act that gives it powers to issue any direction to the central bank governor on matters of public interest.
They, however, insisted that the government has not taken any action of issuing any specific direction and has only initiated consultations with the central bank on unresolved issues.
Without making any reference to the letters, the ministry statement said, “both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.”
“For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators,” it said.
The Government, it said, has never made public the subject matter of those consultations. “Only the final decisions taken are communicated. The government, through these consultations, places its assessment on issues and suggests possible solutions. The Government will continue to do so.”
Sources said the finance ministry wrote three separate letters in the past few weeks to the RBI on issues ranging from Prompt Corrective Action (PCA) framework to liquidity management and sought consultation under Section 7 of the RBI Act.
The Government wants RBI to carve out exemption for power companies under the PCA framework that outlines triggers for declaring a loan account as stressed or NPA, sources said adding the second letter pertained to use of RBI’s capital reserves for providing liquidity to the market and a third letter was for relaxing constraints on banks for loans to small and medium enterprises (SMEs). (PTI)