Home >Industry >Banking >Section 7 of RBI Act on the backburner but threat remains

New Delhi: The government’s most potent weapon to make the Reserve Bank of India (RBI) fall in line is unlikely to go off the table in future board meetings of the central bank. The never-before-used Section 7 of the Reserve Bank of India Act, 1934, which empowers the government to dictate to the central bank, will remain an active option for the government whenever decisive steps to ease the pain of key sections of the economy are to be taken, according to one person familiar with the discussions at the board meeting.

The government’s willingness to exercise its authority to instruct the central bank on policy measures indicates its resolve to quickly ease the fund crunch that businesses, especially small ones, are facing. The person cited above said the central bank’s autonomy has its limits.

“Measures to revive ailing segments of economy have to be taken by sensing their pulse, rather than entirely going by macro numbers that sometimes do not reveal the real picture," the person said. “The government is not expected to align its policies to suit the direction of the central bank."

The centre does not mind nudging RBI for course correction, given that unlike other sectoral regulators such as the Securities and Exchange Board of India or the Competition Commission of India, the central bank does not have an appellate authority. The central bank’s board will meet next on 14 December. “The government has delegated certain functions to the RBI and the latter cannot claim absolute independence," the person cited before said.

Analysts said the conciliatory tone of RBI’s press note on Monday was an achievement in itself given the tensions between the central bank and the government.

“RBI board meeting was a non-event, which is the best possible outcome as far as macro stability is concerned," said Prithviraj Srinivas, senior vice president, institutional equity research, at Axis Capital Ltd.

He said safeguarding jobs was the likely goal of the loan restructuring scheme for small businesses mentioned in the RBI press note.

At its meeting on Monday, the RBI board advised the central bank to consider a scheme for restructuring loans of micro, small and medium enterprises (MSMEs), with total borrowings of up to 25 crore and get its lending restrictions on weak banks reviewed by a panel. MSMEs now face the risk of a recovery action by banks once their loans are classified as bad debts, and if repayment or restructuring of those loans are not viable. A panel to be set up by the government and RBI will study the central bank’s economic capital framework.

“The government and the RBI are taking measures to ease the latest scarcity of funds that small businesses are facing. But one cannot say at this juncture if these steps are sufficient," said a Mumbai-based economist, who did not want to be named.

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