NEW DELHI: The public spat between the Finance Ministry and RBI escalated further with Finance Minister Arun Jaitley openly criticising the central bank for the pile-up of bad loans due to excessive lending between 2008 and 2014.
Jaitley questioned RBI’s role in allowing indiscriminate lending instead of preventing it, saying, “The central bank looked the other way.”
It seemed to be a tit-for-tat reply to RBI deputy governor Viral Acharya’s recent jibe at the government. Quoting Argentine Central Bank chief Martin Redrado’s speech, Acharya flagged the issues RBI was trying to defend hard — autonomy and reserves.
“Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability,” Acharya quoted Redrado as saying.
The issue has been the government’s insistence on higher dividends to balance its fiscal targets, and RBI’s reluctance to dip into reserves to pay higher dividends. Former chief economic advisor Arvind Subramanian had also asked why RBI was holding more than “necessary” reserves.
“Both sides should sit down and talk. This is not the time to fight, when there are macro-economic issues to deal with,” said a former central banker.
Jaitley’s remarks came hours before he chaired the Financial Stability and Development Council meeting with RBI Governor Urjit Patel and all four RBI deputy governors, where he discussed the liquidity crisis in the NBFCs.
The RBI-government spat is nothing new. While the government was miffed with RBI for its rigid stance for the prompt corrective action on PSU banks that curbed lending and put pressure on the government to recapitalise them, RBI was distressed overpressure to relax NPA norms and separate regulator for payment banking.
RBI is learnt to be unhappy over recent changes in the board constitution, and a political appointee. Some observers said the government should perhaps bring more quality people on the board, and bring in a “balance” so that it is not seen as tilted in favour of the government.“RBI also can’t be so rigid. As the finance minister said, you are not the repository of final knowledge,” said the former banker.
Past imperfect
Former finance minister P Chidambaram had serious differences with Y V Reddy and D Subbarao. It is an open secret that the present govt and Raghuram Rajan were not on the same page on many issues
What transpired in Monday's meeting
The govt flagged its concern that the NBFC crisis might spill over to other sectors. RBI, however, said there was no severe liquidity problem and that it was closely monitoring the situation.