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For All Defence Aspirants All About RBI-Government Tussle

For All Defence Aspirants All About RBI-Government Tussle

RBI -Government Tussle

 

Recently, A Deputy Governor Of Reserve Bank Of India(RBI) In A Public Speech, Warned Against Government Interference In RBI’S Working.

Issues Between RBI And Government

Easing Norms Of Prompt Corrective Action (PCA)

RBI Has Frightened Norms Under Prompt Corrective Action (PCA)  That Restrict Lending And Expansion Of Weak Banks. Government And Expansion Of Weak To Global Norms To Ensure That Credit Flow Is Not Hit.

The Government Is Also Seeking More Loans and Easier Norms For Small Businesses But RBI So Far Has Been Reluctant To Lend A Helping Hand.

The Government Has Also Asked The RBI To Give Exemption To Power Companies Under The PCA Framework.

RBI Has Said That Such Move Will Jeopardize All Efforts Of Dealing With Country’s Non-Performing Asset (NPA) Crisis.

Section 7 Of RBI ACT OF 1934

The Ministry Of Finance Recently Started Consultation With RBI On Issues Such As Easing The PCA (Prompt Corrective Action) Framework And Providing More Credit To Micro And Small Enterprises.

This Consultation Was Prior To Issuing The Directions To RBI Under Section 7 Of RBI Act,1934.

Section 7 Empowers The Government To Issue Directions To RBI In Public Interest. The Section States That Directions Must Be Issued After Consultation With RBI Governor.

Such Directives Under This Section Has Never Been Issued In Past Since 1934.

Easier Fund Flow To NBFCS

 

The Government Is Keep On Steps To Make Sufficient Money Available To NBFCS ,Whose Operations Have Been Hit By IL&FS Default.

RBI Is Of The View That Shortage Of Cash Has Eased.

RBI Surpluses

Every Year RBI Earns Interests On The Domestic And Foreign Bonds Held By It.This in come Is Used In Running The Operation Of RBI And Rest Is Accrued As Surplus. Out Of This Surplus, RBI Holds Some Amount With It Self As Equity Capital So As To Maintain Its Creditworthiness And Pays The Rest To The Government.

In 2015, RBI’s Risk Analysis Showed That Its Equity Position Of Around 10 Lakh Crore Was Adequate And Therefore The RBI Decided To Transfer Its Entire Surplus To The Government (AROUND 65,876 CRORE FOR 2015-16).

The Government Is Of The Opinion That RBI Should Pay More Dividend Since Building Up Of Buffers Such As The Contingency Fund And Asset Reserve By The RBI Has Been Far In Excess Of What Is Required To Maintain Creditworthiness.

RBI, On The Other Hand Is Of The View That Increasing The Dividend Payment To The Government May Prove To Be Inflationary As There Will Be More Money In The Market And May Harm The RBI’S Major Task Of Price Stability.

Prompt Corrective Action(PCA)

PCA Norms Allow The RBI To Place Certain Restrictions Such As Halting Branch Expansion And Stopping Dividend Payment It Can Ever Cap A Bank’s Lending Limit To One Entity Or Sector.

Other Corrective Actions That Can Be Imposed On Banks Include Special Audit, Restricting Operations And Activation Of Recovery Plan. Bank’s Promoters Can Be Asked To Bring In New Management Too. The RBI Can Also Supersede The Bank’s Board ,Under PCA.

THE PROVISIONS OF THE REVISED Pca FRAMEWORK BECAME EFFECTIVE FROM APRIL1,2017 BASED ON THE FINANCIAL STATUS Of The Banks For The Year Ending March 31,2017 .The Framework Will Be Reviewed After Three Years.

When Is PCA Invoked?

The PCA Is Invoked When Banks Breach Certain Regulatory Requirement Like Minimum Capital ,Return On Assets And Quantum Of Non-Performing Assets.

Role Of Board

The Government Wants Decision-Making To Be Driven By Board As RBI Is Seen To Be Unresponsive By The Government.

The RBI Believes That Monetary Policy And Regulation Of Financial Sector Should Be Best Left To The Experts And The Government Should Not Unduly Interfere.

In Addition, There Are Other Issues Like RBI Wanting More Power Over Regulating Public Sector Banks

(PSB): RBI Opposition To The Proposed Payments Regulatory Board (PRB) Etc.

Five Flashpoints

1.Easier Fund Flow To NBFCS

Govt Keen On Steps To Make Sufficient Money Available ,Whose Operations Have Been Hit By IL&FS Default. RBI Says Cash Crunch Has Eased.

  1. More Funds To Small Businesses: Finmin Seeking More Loans Easier Norms For Small Businesses Has So Far Been Reluctant To Lend A Helping Hand.
  2. Going Easy On Weak Banks: RBI Had Tightened Norms Under Prompt Corrective Action That Restrict Lending And Expansion Of Weak Banks. Govt Wants Rules To Be Aligned To Global Norms To Ensure That Credit Flow Is Not Hit.
  3. Adequacy Of RBI Reserves: Govt Believes RBI Keeps More Reserves Than Most Other Central Banks And Wants Discussion On The Right Level ..RBI Unwilling To Let The Centre Tap Its Crop Us For Pre-Poll Spending.
  4. Role Of Board: Govt Wants Decision-Making To Be Driven By Board As RBI Brass Is Seen To Be Unresponsive. Central Bank Management Believes Monetary Policy And Financial Sector Regulation Is Best Left To Experts.

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Er. HartaJ is one of the main Instructors and a part of the team At NCA. He himself has cleared the SSB process thrice, but as per his grandfather's Late Lt. Col H.S.Dhaliwal Wish he is continuing teaching and making officers. Been associated with New Careers Academy for the last 8 years, he also has been succefull in making Second and Third Generation Of officers. Once Taught by his Grandfather and Father Capt. Dhaliwal. He is know all across with students for the way he teaches and he is more of a role model for them .