RBI forms despite govt. Seeking consultation under section 7 :UPSC


What is Important?
UPSC perspective:
Prelims :Highlights
Mains:Highlights & RBI's autonomy


Why in News?

The Reserve Bank of India (RBI) has refused to provide any leeway to stressed borrowers or give in to the demand of higher dividend by the government, which issued three letters to the Central bank in the last one month for consultation under Section 7 of the RBI Act.

About Section 7 of RBI Act. 1934:

*Section 7 (1) of The RBI Act, 1934, became a contentious issue after the tension between the central bank and government turned into a public spat over the last few days.
*No government has so far invoked this section in the central bank’s 83-year history.
*Section 7 of the RBI Act empowers the central government to issue directions to the RBI in public interest. 
*Section 7 has two parts — consultation and then issuing a direction to the RBI for taking some action in public interest.
*Once the Section 7 is invoked, the general superintendence and direction of the affairs and business of the Bank is entrusted to a Central Board of Directors which may exercise all powers and do all acts exercised or done by the Bank.
*It is considered that such a move could be a last resort for the Government to increase liquidity, ease pressure on banks and businesses, and boost economic growth.

What led to this situation?

The central government issued three letters to the central bank in the last one month for consultation under Section 7 of the RBI Act.
* one letter pertained to exemption for power companies from new stressed asset norms, while another one was to dilute capital threshold norms of the prompt corrective action framework. Yet another one communication was pertaining to more capital to the government from the reserves of the central bank.
*However, RBI has refused to provide any leeway to stressed borrowers or give in to the demand of higher dividend by the government.
*RBI on its part said that it has responded to all the communications that were sent by the government and has decided to maintain its stance.
*This made the government to invoke its powers and initiate consultations under Section 7.

RBI autonomy is essential

*The government has now started the first step under Section 7, which is to start consultations with the RBI Governor on issues such as easing the PCA framework, providing more credit to small units.
*The next step lies in issuing a directive to the RBI, something which has never been done so far in the history of the RBI.
*The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement.
*Governments in India have nurtured and respected this.
*Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.
*For the purpose, extensive consultations on several issues take place between the duos, time to time and this is equally true of all other regulators.






RBI forms despite govt. Seeking consultation under section 7 :UPSC RBI forms despite govt. Seeking consultation under section 7 :UPSC Reviewed by The Hindu Current Affairs on November 01, 2018 Rating: 5

No comments:

Powered by Blogger.