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The Union government can not invoke Article 7 of the RBI law to give instructions to the central bank, with the aim of reducing tensions between North Block and Mint Road, sources informed of the government's reflections said. . L & # 39; Hindu.
"It is understood that the government has decided not to give instructions to the RBI (…) .It is estimated that it is not necessary to intensify the tension," said a source.
The central board of the RBI will meet on Monday to discuss the contentious issues raised at the last board meeting: economic capital, central bank governance issues, revitalization of micro, small and medium enterprises, and rapid corrective measures (PCA). ) framework for banks.
The 23 October Board meeting resulted in no consensus on these issues and was lifted after an eight-hour discussion.
Although the government has "referred" section 7 of the RBI Act to "consult" on these matters, it can refrain from giving instructions, as such a move would have broad ramifications.
Section 7 has never been used in the 83 years of the bank's history. To invoke it would be interpreted as an interference in the autonomy of the central bank. This would also affect international agencies such as the International Monetary Fund (IMF), which issue ratings for central banks. "These agencies have been raising the issue of Article 7 for some time now, stating that" if such a provision exists, then how can the RBI be independent? ". However, the RBI told them that even though this provision exists, it has never been used, "said another source.
To meet with the government mid-term, the RBI could take steps to increase lending to the MSME sector that had been hard hit by the demonetization exercise and that the government wishes to support in an election year. However, one has to see how much RBI can do, since the central bank can make reservations about the sector's ability to absorb loans at this stage.
The RBI can also get down from its position of strict standards for the PCA framework for banks. Up to 11 out of 21 public sector banks fall under the CPA, which the government says slows loan growth. RBI may facilitate some of the conditions, which may help some lenders get out of the PCA.
The RBI and the Center can also reach an agreement to create two committees to examine the issue of the economic capital of the RBI and other governance issues.
"The issue of economic capital is a technical issue and the conclusion on such an issue can not be reached at a two-hour board meeting," one source said.
On the issue of governance, it is increasingly felt that the leadership of the RBI must be made accountable to the board. To date, the board has refrained from dealing with specific policy issues and its main objective has been to provide a broader view to the central bank. It was argued that the central bank had failed on many issues – such as not anticipating the IL & FS crisis and insufficient control over fraud at the Punjab National Bank – and that its management should have been made responsible to the board.
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