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It is considered an instrument of last resort, a direct order of the government of the day to the central bank to fulfill its wishes.
Despite his growing frustration with the RBI headed by Urjit Patel, the Modi government resisted suggestions that it invoked Article 7 to increase liquidity, ease pressure on banks and businesses and stimulate economic growth. However, there are indications that, through recent communications, she has initiated a consultation process with the RBI in three areas of concern and, in doing so, has referred to section 7 without invoking it.
These areas are energy sector loans, "quick fixes" (PCA) and special exemptions for micro, small and medium enterprises (MSMEs).
Article 7 of the RBI Act provides: "The Central Government may, from time to time, issue instructions to the Bank which it may, in consultation with the Governor of the Bank, deem necessary in the general interest . "
The government's decision is important in that such a consultation process could eventually lead the government to issue instructions if the blockage persists.
The issue of the invocation of Article 7 was raised in a hearing before the High Court of Allahabad in a case filed by Independent Power Producers in which it challenged the RBI's February 12 circular, which removed any loan restructuring mechanism in default. After RBI 's lawyer had stated that the government could legally instruct the central bank, the court, in its August ruling, said such an approach could be considered.
Historically, whenever governors have talked about the independence of the central bank, they have never failed to point out that section 7 has never been used.
A senior government official said that nothing had been done to invoke article 7. Another person, interviewed, said, "Communication between the government and the central bank is sacro holy and can not be divulged.
Rumor has it that the government reportedly cited Article 7 as the trigger for Deputy Governor Viral Acharya's explosion against the government last Friday. Although he made no reference to the section, he did however explain how the government could undermine the independence of the central bank by "blocking or opposing bank policies." centralized rules and by favoring discretionary or joint decision-making with direct government interventions ". .
The government wants to relax the standards for unproductive badets in the electricity sector, which currently require companies to go to bankruptcy courts. Once admitted, the companies must be sold or liquidated.
His concern about "prompt remedies" is that the PCA's clbadification imposed restrictions on lending and expansion to 11 public sectors and one private bank, which, according to it stifles the flow of funds to several sectors. The government is also concerned about the fate of MSMEs and wants the definition of bad debt to be relaxed.
The liquidity situation is further aggravated after a series of IL & FS defaults in September. The failures had a cascading impact: the MFs that had invested in the IL & FS debt were affected, the companies that had placed short-term funds in MFs became cautious and the funds themselves became cautious about the down payment in financial companies.
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