RBI has signalled a compromise with the government after a much public spat between the monetary policy makers and their political bosses. Here's a look at the key personalities in the RBI vs Government fight
Urjit Patel, governor of the Reserve Bank of India
Reserve Bank governor Urjit Patel’s silence on demonetisation had come under severe criticism. His reticence was seen as his approval of the move to abruptly withdraw ₹ 500 and ₹ 1,000 currency notes. A lot has changed since then: Patel seems to have found his voice and has not shied away from a public confrontation.
The first signs of a disagreement emerged when state governments were offering loan waivers last year. In April 2017, Patel said “waivers undermine an honest credit culture".
In March this year, Patel said RBI has limited legal authority to hold government-owned bank boards accountable on strategic direction, risk profiles, assessment of management and compensation. The next flashpoint was when RBI issued its contentious 12 February circular on loan defaulters. The government argued that the move was harsh, especially on stressed power producers.
This, coupled with RBI denying there is a liquidity crunch in the non-banking financial companies sector, irked the government further. By standing his ground in the face of pressure from the industry and the government, Patel has proved his mettle.
Arun Jaitley, finance minister of India
Finance minister Arun Jaitley, 65, has his task cut out in the run-up to national elections early next year.
Enabling banks saddled with a pile of toxic assets to finance new projects and addressing the cash crunch faced by small businesses are the most important challenges before him.
Considering the role of small businesses in creating jobs, especially in rural India, liquidity is crucial.
Besides, traders and small businesses are a key support base for the ruling Bharatiya Janata Party (BJP).
The unprecedented differences between the Reserve Bank of India (RBI) and the finance ministry, therefore, does not augur well and has surfaced in the most inopportune moment.
For the Narendra Modi administration, which came to power in 2014 promising strong economic growth and prosperity, it is important to help small businesses recover from the impact of the 2016 demonetization and the initial disruption caused by the implementation of the goods and services tax in the following year.
Given that banks are now focusing on the recovery and resolution of bad loans, which had resulted from the lending spree after the 2007-08 global economic crisis, balancing prudent lending and ensuring liquidity in the system is therefore on top of Jaitley’s agenda.
Viral Acharya, deputy governor of the Reserve Bank of India
Deputy governor Viral Acharya does not mince words. His speech on 26 October on the independence of the central bank set the tone for the public battle between the regulator and the government. Acharya, 44, had pointed out instances where undermining the central bank’s independence is regressive.
A government’s horizon of decision-making is rendered short like the duration of T20 cricket by several considerations, Acharya said, adding it is always under pressure of elections.
Acharya, a C.V. Starr Professor of Economics at New York University’s Stern School of Business, had been with the university since 2009, prior to which he was teaching at the London Business School. A 1995 graduate from the Indian Institute of Technology, Mumbai, Acharya has a Ph.D in finance from NYU-Stern.
Rajiv Kumar, secretary in the department of financial services
Rajiv Kumar, secretary, department of financial services, is spearheading the government’s push to bring down capital adequacy norms mandated by the RBI for Indian banks in line with the Basel 3 requirements.
A 1984 batch IAS officer from Jharkhand, Kumar has been at the centre of the ongoing crisis as one of the two government nominees on the board of the central bank.
Kumar is also at the forefront of the government’s attempt to ease the prompt corrective action framework of the Reserve Bank of India that places restrictions on lending on 11 of the 21 state-run banks as it looks to step up credit flow to small and medium enterprises.
Despite his reputation as someone who gets the work done, he has had to walk a fine line as the government has to take the Reserve Bank of India (RBI) along on key policy decisions involving state-run banks.
During his tenure, the government managed to push through the privatization of IDBI Bank and kick-started the consolidation process of banks.
Swaminathan Gurumurthy, part-time director of the Reserve Bank of India
Swaminathan Gurumurthy stirred the pot in the ongoing tussle between Reserve Bank of India and the union government last week when he said that there is a strong case for the central bank to improve banks’ lending capacity by easing regulations.
Never afraid to speak his mind, Gurumurthy backed the government’s stance on issues such as improving liquidity for non-banking financial companies, a key source of funds for small businesses.
Gurumurthy, who is also the editor of Tamil weekly Thuglak, while delivering a lecture in New Delhi, said, “Once money is released to this sector, growth rate, consumption, and investment will pick up because it is a bottom-up economy. A new thinking is needed."
His comments came at a time of heightened tension between the government and Reserve Bank of India over a host of issues.
Gurumurthy criticized the removal of forbearance on restructuring and the massive clean-up of bank balance sheets initiated by former central bank governor Raghuram Rajan.
He has been a supporter of the view that the central bank’s money should be used to recapitalize state-run lenders.
His appointment to the board of the Reserve Bank of India as a part-time, non-official director drew criticism with the Congress party citing his association with the Rashtriya Swayamsevak Sangh (RSS), the ideological parent of the Bharatiya Janata Party.
Subhash Chandra Garg, secretary in the economic affairs department
On 31 October, when the finance ministry released a carefully worded statement on its differences with the RBI, it was seen as a sign of its maturity. However, on 2 November, economic affairs secretary Subhash Chandra Garg posted a tweet, mocking deputy governor Viral Acharya’s claim that governments that do not respect independence of central banks incur the wrath of financial markets.
This left nobody in doubt that it is Garg who is leading the ministry’s face-off with RBI.
At a recent Financial Stability and Development Council meeting, while finance minister Arun Jaitley hardly spoke, the ministry’s case was presented by Garg. He has headed a panel that suggested a new regulator to deal with payment-related issues. However, RBI has rejected the idea, issuing a dissent note.
N.S. Vishwanathan, deputy governor of RBI
N.S. Vishwanathan, a career central banker, is known among his colleagues as one who can explain complex central banking matters in lucid terms. With an eye for detail and the ability to back his arguments with data, the deputy governor has been RBI’s go-to person for explaining its rationale on contentious issues such as the 12 February circular and the need for banks to hold adequate capital buffers.
In a speech on one-day default norms, he had said when a borrower delays coupon or principal payment on a corporate bond even for one day, the market would penalize the borrower heavily but defaults in bank borrowings have not attracted similar reaction.
In a second speech on capital requirements of commercial banks, he had argued that while people say the quantum of capital to be held by banks for unexpected loss should be left to the market forces, any failure of the market forces could lead to loss of deposits or affect taxpayers through recapitalisation.
Having joined Reserve Bank of India in 1981, Vishwanathan looks after the departments of banking regulation, communication, co-operative banking regulation, non-banking Regulation, enforcement, inspection and risk monitoring.