Source: The Hitavada      Date: 02 Nov 2018 12:12:06

IT IS unfortunate and saddening that the relations between the Central Government and the country’s Central Bank -- the Reserve Bank of India (RBI) -- have been suffering from an absence of healthy communication over time through different political regimes. It is unfortunate that Union Finance Minister Mr. Arun Jaitley has to say that the RBI failed to restrain the public sector banks going overboard while granting credit to wrong parties in such a big way. And it is equally unfortunate that RBI Governor Dr. Urjit Patel has to respond by saying, in effect, that the bank has no powers to exert reasonable control over the commercial banks. This absence of appropriate and healthy communication between the Centre and the country’s Central Bank shows actually the cancerous spot in the Indian banking. Unless urgent steps are taken to rectify this, conditions are more likely deteriorate than not in the coming times.

That the Government has to talk of taking resort to the Act 7 of the Reserve Bank of India Act permitting it to engage in consultations with the RBI, also indicates that until now, the Centre had refrained from its use as part of its belief that the RBI be left alone to manage its own affairs. Experience shows that the Government, no matter its political ideology, has never sought to disturb the functioning of the RBI in the name of fair consultations, and therefore never used the Act 7 that empowers it to seek consultations. The Government deserves due credit for this sense of restraint over the past seven decades during which the RBI fumbled on quite a few occasions.

Over the past seventy-plus years, the RBI could have reshaped its governance policies and issues by creating legitimate space for its leadership to reshape Indian banking. If there were some flaws in the RBI Act, the RBI top brass could have sought appropriate changes in the statute so as to empower itself to take necessary steps to rein in the public sector banks that have often shown signs of waywardness in granting of credit to various parties. In fact, the RBI has had many iconic Governors whose visionary outreach was far beyond the confines of rules and regulations. They could have sought to bring in appropriate changes so that they could exercise reasonable powers over the public sector or commercial banks. Because nothing of this sort was done, a person of the eminence of Mr. Arun Jaitley had to raise the issue and place the blame at the RBI’s door.

Of course, in a big way the political leadership of the country also has much to do with the sickening spectacle of India’s banking sector. It is common knowledge that much of the trouble in banking sector has been caused by undue interference of the political element in the functioning of the banks. Most unfortunately, the banking sector did not see many leading lights who had the courage to stand up to the political pressure and say ‘no’ to any interference. Much to the contrary, many banking bigwigs found it desirable to pander to the whims of the political component and thereby derive some non-official benefits for themselves.

In the nutshell, it can be said safely that both, the political and banking sectors pandered to each other’s (non-official) demands and made a mess of the critical component of the economy. Now if this malaise is to be rectified, both of them will have to reach out to each other with a view to solving the problem, rather than getting trapped in the normative arrangement regulated by Act 7. This is the need of the hour.

At this stage, it is necessary for both, the Centre and the Central Bank, to come to a clean understanding of mutuality of benefit so that the economy does not suffer anymore through inept banking. Act 7 or no Act 7, what is of greater importance is to establish communication beyond the statute’s confines.