When Urjit Patel succeeded Raghuram Rajan as Reserve Bank of India Governor in September of 2016, it was speculated he will speak in a language that the Centre wants to hear.
This speculation turned into belief in two months when the central board of RBI — headed by Dr. Patel — approved demonetisation, a move that rendered more than 86% of the currency in circulation invalid overnight, without asking a question.
Several economists, including Former RBI Governors, questioned Dr. Patel’s ‘silent approval.’ Yaga Venugopal Reddy, who was the RBI Governor between 2003 and 2008, went on to say he would have resigned if he had been asked to implement demonetisation.
Sometime next year, the government started demanding higher dividend (the surplus that the RBI generated from its operations) with some government nominees on the board aggressively pushing for it. The then Chief Economic Advisor Arvind Subramanian, was already voicing his demand for higher dividend from the RBI for recapitalising public sector banks.
The first public spat between Urjit Patel-led RBI and the Finance Ministry, surfaced when Dr. Subramanian criticised the interest policy as he wanted lower rates. In an indication that things were not well between the North Block and Mint Road, Dr. Patel said publicly that all the monetary policy committee members had declined North Block’s invitation for a meeting to discuss interest rates.
PNB scam
Then the scam in the state-run Punjab National Bank broke out early this year. The magnitude of the scam was quite unprecedented and threatening to dent the government’s image as anti-corruption crusader.
Finance Minister Arun Jaitley went on to say that “politicians are accountable but regulators are not,” indicating the government’s displeasure at the alleged failure of the RBI to detect the fraud. Probably, that was the time when Dr. Patel thought enough was enough.
The generally reticent governor, who is not known to be vocal like his predecessors, chose Gujarat National Law University in Gandhinagar to deliver a speech in which he said banking regulation is not ownership neutral and that the banking regulators do not have much power to regulate public sector banks unlike private sector banks.
In particular, he said RBI did not have the powers to supersede the board of a public sector bank since they are not registered under the Companies Act, unlike private sector banks.
Coincidentally, 2018 was the year when several private sector banks incurred the RBI’s displeasure for ‘violating norms.’ Actions taken against these banks include from not agreeing to extend the tenure of the CEOs to freezing compensation.
But the RBI decided to take action against the public sector banks in a different way. The Prompt Corrective Action framework was made stringent. The earlier PCA framework was rarely used to impose restriction. Under the new framework, restrictions were imposed on wholesale basis — as many as 11 out of 21 public sector banks are now under PCA — which made the government believe that credit growth would be impacted adversely in an election year.
Finally, the government decided to change its language. The never-used Section 7 of the RBI Act was referred for ‘consultation.’ The next step would have been to issue ‘directions’ under the Act — a move that would have been interpreted as interfering with the central bank’s autonomy.
