A Bank Sheds Its Reserve
RESERVE BANK OF INDIA Urjit Patel took a tough line on bad loans and RBI reserves, and went out fighting for the central bank’s autonomy
It is not uncommon for the country’s banking regulator to be at loggerheads with the government of the day, especially when it comes to monetary policy. However, 2018 saw a rare public spat between the government and the Reserve Bank of India (RBI), which spooked investors and markets alike as the government held consultations under the rarely used Section 7 of the RBI Act. The tug of war continued for nearly two years and ended with the governor, Urjit Patel, resigning on December 11.
The fraught relationship started with the Centre discontinuing 86 per cent of the currency in circulation in November 2016. The move caught the banking system by surprise and Patel, who had occupied the hot seat just a couple of months earlier, faced the flak for bad currency management. What followed was a series of arguments over the RBI’s powers, ownership of banks, bank reserves and norms regarding nonperforming assets (NPAs).
Patel often made the point of greater control over public sector banks, especially after being criticised for lax scrutiny of banks following the Rs 11,000 crore Punjab National Bank scam involving Nirav Modi. Another point of contention has been the transfer of reserves. While it was argued that previous governors have transferred a substantial percentage, Patel resisted. Third has been the issue of regulatory scope. The government has been pushing for a separate payments regulator while the RBI has said that payment systems are a subset of currency, which is regulated by the RBI. The central bank argues that the composition of the Payment Regulatory Board is not in conformity with the announcements the finance minister made in the finance bill. The final straw was the crisis in nonbanking financial companies fuelled by the Infrastructure Leasing & Financial Services (IL&FS) fiasco.
Although there seemed to have been a thaw in relations in its much reported board meeting on November 19, Patel chose to resign soon after. He thus became the first governor to leave citing ‘personal reasons’, nearly nine months before his tenure ended.