Tuesday’s developments not only signal a ratcheting up of tensions, but also underline the rising stakes in their face-off, especially since on Monday, a senior government official had informally signalled a cessation of hostilities.
The differences spilled over into the meeting of the Financial Stability and Development Council (FSDC), which Jaitley chaired after returning from the USISPF event and attended by RBI governor Urjit Patel. The sequencing was such that the minister’s remarks and their tenor were making headlines even before the meeting was convened.
Though Jaitley and Patel did not directly confront each other, people familiar with the development said senior officials from either side differed aggressively on issues such as offtake of credit and enhanced liquidity to cash-strapped non-banking financial companies (NBFCs).
Ironically, FSDC seeks to facilitate greater cooperation among regulators to ensure financial stability, develop the financial sector and looks into issues of overlapping jurisdictions. The meeting on Tuesday was attended by four RBI deputy governors, including Viral Acharya, whose warning on Friday about impinging on the autonomy of the central bank had triggered the acerbic exchanges.
During the meeting, finance ministry officials asked RBI not to let the liquidity situation in NBFCs get out of hand as there was a risk of it spilling over into other sectors.
“RBI officials in reply said there is robust credit growth and it does not have any data that suggest NBFCs are facing a liquidity crunch. At this stage, Jaitley advised banking secretary to provide necessary data to RBI in this regard," a government official said on condition of anonymity.
Earlier, Jaitley alleged that the Congress-led United Progressive Alliance artificially propped up the economy by allowing banks to lend indiscriminately, resulting in a spike in the accumulation of stressed assets to ₹ 10 trillion. In this, he held RBI culpable for failing to check it.
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“The central bank looked the other way," Jaitley said in his USISPF speech, adding that bank credit growth in one of these years was 31%, against the normal trend of 14%.
“I am surprised that at the time the government looked the other way, the banks looked the other way, I do not know what the central bank was doing. It was a regulator... They kept pushing truth below the carpet," Jaitley added.
When contacted, the RBI spokesperson declined to comment.
Patel was brought in as the deputy governor in January 2013 by the UPA government and became the governor after Raghuram Rajan demitted office in September 2016.
On condition of anonymity, a person familiar with the developments in RBI said Jaitley’s statement evidently pertained to 2008-14, when—even institutionally—there was no legal dispensation to deal with non-performing assets (NPAs) other than restructuring mechanisms. “But, between then and now, RBI has implemented many measures to deal with NPAs, such as AQR (asset quality review), Crilc (Central Repository of Information on Large Credits), etc," the person added.
The person claimed that though the government had objected to the prompt corrective action (PCA) and it had become a source of discord, the truth of the matter was that it was based on an extensive consultation process. “The government examined all the provisions and then broadly agreed with them. It is only then that PCA was implemented," added the person.
RBI, in turn, was miffed with the selection of board members. “With over ₹ 11.5 trillion of NPAs in the system, there is not a single board member with commercial banking experience or expertise. The one board member who had some experience was pulled out," the person said, referring to the abrupt termination of Nachiket Mor’s tenure on the RBI board.
Responses towards the escalation in confrontation between RBI and the union government were mixed.
While the political response was predictably along partisan lines, a former RBI governor called for more serious contemplation.
“I have been surprised today by the sharp attack of the finance minister on RBI and its performance. RBI is independent and autonomous," said senior Congress leader Anand Sharma.
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On the other hand, US brokerage Morgan Stanley claimed that RBI was more independent now.
“The fact that the RBI brass is speaking out in the open illustrates that the central bank enjoys a lot of independence," the brokerage firm’s India research head, Ridham Desai, said in Mumbai.
The former RBI governor who did not want to be identified warned that the current problems exposed a deeper crisis. “The sovereign is supreme but the central bank is accountable to society. One must ask the question as to why RBI is going to this extent to assert its point of view. It is because the issues involved are very crucial and the potential fallout can be very big."
Anuja and PTI contributed to this story.