- Recently, the debate over independence functioning of RBI has been one of the hot topics. The contention is mainly about RBI seeking more power to control bad loans, regulating banking actions including powers to remove chairmen, directors or CEOs of state owned banks. Both the Government and the RBI seem to be locking horns over such issues.
- Furthermore, the sudden tightness in the financial market for non banking finance companies (NBFCs) and the strict implementation of the defaulter rule even if a company misses payment for a day, have put the regulator and the government on a potential collision course.
- However, the government interventions to transfer dividends from RBI to government keeping in mind the MSMEs sectors and their flourishments seems the government is forcing the central bank to act in certain manner.
- The idea of central bank independence began to germinate some two decades ago, the independence here was understood as ‘functional autonomy’. This means that the bank will not be restricted or limited in its functioning by the government in both instrument used by the bank and how it used.
- However, such autonomy is not absolute and is certainly not to extend to ‘goal’ independence. Such goal and functions of the bank’s should be chosen by the Government in power that too without the reference of the bank. This is because the government understands the broader mandate of country’s present need i.e. to say the broader public interests.
- However, the RBI looks for the long term financial stability in contrast of the government’s short term stability. The cause of the RBI seems to be universal and wider in comparison to government’s focus on short term liquidity easing.
- Moreover, the government should also adhere to the span of independencies provided to the central bank and should not force or coerce the bank to function in certain manner. The autonomy provided should be obeyed and respected by both in spirit and letter.
Where does RBI stand in terms of Autonomy?
- RBI stands the least independent central bank among 89 central banks of the world considered by a study conducted by International Journal of Central Banking in 2014. However, the RBI has got some sort of independence since the adoption of inflation targeting mechanism in 2015 and formation of Monetary Policy Committee in 2016.
- Financial Sector Legislative Reforms Commission has back in 2013 recommended to cut down the RBI’s power. Government in 2013 itself established a monitoring body called Financial Stability Development Council which was to be chaired by Finance Minister.
- However, setting up of such parallel regulatory agencies with weaker statutory powers and/or encouraging development of unregulated (or lightly regulated) entities that perform financial intermediation functions outside of the purview of the central bank undermines central bank’s independence.
- Government’s proposal to RBI for amending the Payment and Settlements Systems Act that would take away the regulation of payments from RBI is certainly the way of taking away the autonomy enjoyed by central bank.
- In essence, the RBI Act 1934 does not empower RBI absolute autonomy. However, it does enjoy some independence when it comes to performing its regulatory and monetary functions.
- Section 7 of RBI Act empowers government to give direction from time to time to the Bank as it may after consultation with the governor of the Bank, consider necessary in the public interest. Exercising powers under this section, the government has sent several letters to the RBI governor in recent weeks on issues ranging from liquidity for non-banking financial companies (NBFCs), capital requirement for weak banks and lending to micro, small and medium enterprises (MSMEs). Such initiatives of government without considering the consequences and more for political gain certainly undermine RBI autonomy.
- Such aggressive move could scandalise a section of academia and experts, while raising questions about the government’s intentions and the impact on RBI’s autonomy.
Whether RBI has adequate power to act independently?
- The governor indicates that RBI does not have enough powers over PSBs. But RBI does have nominee directors on bank boards and from this post he can regularize the function of PSBs. Further, RBI leads physical inspection at banks and financial audits. It has also orchestrated mergers between banks who were on the verge of collapse. So RBI does have adequate control over PSBs but may not be exercising it fully.
- The government’s present stand of easing lending norms seem to be good considering the health of MSMEs. After all it’s the MSME sector which is most affected following the demonetisation and implementation of GST.
- The crying need now is to provide these MSMEs with easy lending norms, interest rate subvention etc. rather forceful coercion of these MSMEs by the banks. However, the announcement to get loans in just 59 minutes by the government sounds more to play boundary in coming elections rather than actually supporting MSME sectors. And hence, the resistance of the RBI against such desperate action should seen in right direction.
- Both the Government of India and the Central Bank in their functioning, have to be guided by public interests and the requirements of the Indian Economy. The autonomy of both the institutions are well framed in their constitute laws and should and must be followed by both the stakeholders.