For the first time ever Government may issue directions to RBI

The situation between the government and RBI has been tense since the beginning of this year regarding a series of issues. The Government, as on October 31, 2018, is considering using the directive power under Section 7 of the Reserve Bank of India Act, 1934 (‘the Act’) to mandate the RBI to do its bidding, leading to a showdown between the two. Section 7 of the Act empowers the government to issue directions to the RBI in matters of public interest.

Some points of differences between RBI and Government which led to this are –

• RBI’s ‘Prompt Corrective Action Framework’, which is a regulatory Intensive Care Unit (ICU) for sick banks, has 11 out of 21 public sector banks operating under these emergency measures. Government has asked for relaxation of this framework as it restricts lending and hinders growth. RBI has repeatedly explained the need for such a framework and vehemently opposed relaxation of this framework.
   
• Government thinks RBI is sitting on excess capital and must transfer some of it to meet the fiscal target. However, RBI’s current and former officials have opposed this move of the Government.
   
• Government has suggested to set up a payment’s regulator outside the purview of the RBI. However, RBI publicly disclosed its dissent note on the Government’s proposal to set up a Payment Regulatory Board and said that RBI, a regulatory body which overlooks banking and payment, is well-functioning and the change in the structure will be detrimental to the economy.

Takeaways

1. RBI was constituted to take over the government functions which was earlier performed by the Controller of Currency and the Imperial Bank of India. Section 3 of the Act lays down, “RBI shall be constituted for the purposes of taking over the management of the currency from the Central Government and of carrying on the business of banking as per the Act.”
   
   If Section 7 of the Act is invoked, some of the functions which are independently performed by RBI may be performed as per the directions given to it by the Government.
    
2. Section 7 of the RBI Act states that the Central Government in consultation with the Governor of RBI may, from time to time, give directions to the Bank in public interest. Further, the powers and functions of the bank may be entrusted to a Central Board of Directors under Section 7. Public interest has a wide definition and there is a possibility that the Government, if it invokes this Section, could read a lot into it and make various sweeping decisions.
    
3. It is pertinent to note that Section 7 of the Act has never been invoked by any governments, not even in the 1991 economic crisis or in the 2008 global financial crisis.