NBFC: The six things that have widened the gap between RBI and the government

A speech last week by Viral Acharya, deputy governor of the Reserve Bank of India (RBI), highlighted the tensions between the RBI and the government. Stressing the importance of central bank autonomy, Acharya issued a warning to the government: do not touch the RBI. However, the rift between the government and the RBI, particularly its governor Urjit Patel, has widened in recent months, with differences increasingly on key issues.

According to a report from the TOI, communications between the government and the RBI have been completely halted. The tension triggered feverish speculation about Patel's fate. Not only does it seem highly unlikely to obtain an extension beyond the three-year term ending next September, but questions have arisen as to its continuation, according to the report. Patel did not respond to a message from you. Some members of the NDA government went so far as to privately acknowledge that "even Raghuram Rajan was better than that" – and that Patel's predecessor did not leave at the best of conditions, the report says.

In 2018, the RBI and the government developed differences on at least six major issues:

1. Interest rate

The conflict began with the RBI's dissatisfied government focused on inflation for not reducing interest rates – or even raising them. However, this has spilled over into regulation, which, according to the central bank, is its exclusive domain. What followed was a host of regulatory issues where both parties asserted the one against the other.

2. NPA classification
The February 12 RBI circular on the classification of non-performing assets and loan restructuring standards was the next critical point. The government has judged the situation too severe. In fact, he pushed all but two state-run lenders into the red.

3. Nirav Modi scam

Around the same time, when the Nirav Modi scam broke out, the government began to monitor the RBI, prompting an almost immediate rebuttal, with Patel seeking more power to oversee public sector banks to be on par with their peers in the private sector.

4. NBFC

The government insisted that RBI intervene to relieve the non-bank finance companies (NBFCs), which are struggling with a lack of liquidity due to the failure to repay the loans IL & FS. The central bank refused to play ball.

5. Abduction of Mor

In September, Nachiket Mor was removed from the RBI board more than two years before the end of his term, without having officially informed him. This angered the brass of the central bank. His withdrawal was seen as related to his vocal opposition to the government's request to increase the dividend.

6. Payment regulator

A separate payments regulator is another sticking point with RBI, which has publicly stated its position on why it did not support the decision. In fact, he went so far as to publish his dissent on a separate regulator on his website.

However, the government does not see the whole issue as a contest between the two parties. The TOI reports that government members have said that tension should not be perceived through a prism between the government and the regulator. They argued that it was incumbent upon the governor to direct the board of directors. They also denied attempting to encroach on RBI's territory, but added that institutional autonomy should be a means to accelerate growth rather than an end in itself.