Stand-Off To Skirmish: Government Forced To Invoke Section 7 Of RBI Act Due To Central Bank’s Inflexibility, Say Sources

Finance Minister Arun Jaitley and RBI Governor Urjit Patel (Photo by Mohd Zakir/Hindustan Times via Getty Images)

The government is forced to initiate consultation on a dozen issues under the rarely used Section 7 of the Reserve Bank of India Act due to the Reserve Bank’s failure to act on any of them, as reported by The Economic Times.

“We have been engaged with the RBI on many of them for a year or more. RBI could have accepted four or five of these proposals, and said no to the others,” said an official. “It has not acted on any of them. It has not even taken them to its board. What choice did the government have?”

The government has held multiple discussions with the Central Bank on subjects primarily aimed at promoting credit offtake while easing liquidity to spur growth for a long duration, the sources said.

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Housing finance companies and mutual funds; lower risk weights for credit to micro, medium and small enterprises (MSMEs) and also a framework for the restructuring of their loan accounts and an exclusive window for non-banking finance companies (NBFCs) are few of the issues included. The government had also sought a facility for banks to raise to 30 Billion Dollars.

The government has also raised doubts over the effectiveness of the prompt corrective action (PCA) framework for stressed banks and asked the RBI board to discuss a proposal to readdress the financial needs of the Central Bank which would then allow the government to tap into the bank’s reserves.

Currently 11 banks are operating under the PCA framework, facing lending restrictions which scuttles the credit growth, feels the government. The RBI on the other hand, wants these banks to recover before they start lending.

The source added that RBI had not given any positive response and that the government was willing to hold their ground on a variety of issues apart from the ones mentioned. This had resulted in a stand-off between the regulator and the government.

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