India: Insiders blame RBI’s cold play with India Inc for showdown with Centre

  • The Reserve Bank of India-government stand-off is probably a fallout of the central bank’s aversion to meeting with representatives from the industry, thereby forcing the government to articulate industry concerns through its board nominees, said central bank observers.
  • With communication from the regulator falling to a trickle on various issues, industry lobby groups and associations feel that they have little choice but to approach the government to voice their concerns in the light of the widespread perception that Mint Street is giving short shrift to their problems.
  • Bankers, analysts and former RBI officials, who did not want to be identified, said that this has probably worsened the RBI-government divide which was already evident in the early part of 2018 on some issues such as the regulator’s 12 Feb 18 circular telling banks to take action if the borrower delays payment even by a day.
  • A few members of the RBI board met informally on 29 Oct 18 to discuss the conflict between the regulator and the government and to come up with a compromise but it remains elusive at this point, said a person familiar with the matter.
  • In the past two years, under governor Urjit Patel the RBI has taken many tough decisions – from driving resolution of bad debts under the Insolvency and Bankruptcy Code, to considering missing of payments by even a day as default, and making strict rules for banks under the prompt corrective action (PCA) framework. Many of these rules have upset the industry.
  • Furthermore, the recent tightening of credit markets after the default by Infrastructure Leasing & Financial Services (IL&FS), and the sell-off in NBFC shares led to industry seeking some relief which the central bank did not provide to satisfaction, people familiar with the situation said.
  • “The governor refuses to meet people and his deputies are also wary of any interaction,’’ said a bank treasury head. “Forget public interactions, even private communication between the central bank and the government has taken a hit. This is not healthy for any market.”
  • Interactions between the RBI, financial markets and industry were vibrant in the past when the RBI was headed by Dr Bimal Jalan, YV Reddy, D Subbarao and Dr Raghuram Rajan.
  • Relationship appears to have soured after some members of the RBI board raised certain issues in the board meeting last week which is quite unprecedented since most of RBI board meetings follow a routine agenda and do not discuss weighty matters such as monetary policy or bank rules and regulations as these are decided by the respective departments.
  • Experts and officials said both the entities are entitled to air their views, but did not see the relationship worsening further.
  • There are various factors that may prompt the two institutions to calm down. The economy is chugging along at a robust pace and, by all accounts, is estimated to expand 7.5% and retain its tag as the fastest growing major economy in the world.
  • There are other stress points that may need a coordinated action. The financial markets have been choppy and non-banking finance companies (NBFCs) are grappling with a funds crunch.
  • Problem of bad loans affecting state-run banks will also require a close look from both sides, and that too at a time when the general elections are a few months away.

External Link: https://economictimes.indiatimes.com/news/economy/policy/many-feel-a-reserved-bank-responsible-for-standoff/articleshow/66423565.cms

External Link: https://economictimes.indiatimes.com/news/economy/policy/rbi-vs-centre-relationship-may-not-sour-further-say-experts/articleshow/66425802.cms

30-Oct-2018


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