The recent stand-off between the Centre and RBI is that of a tussle for power and threatens the question of RBI’s autonomy. Reserve Bank of India otherwise known as Central Bank executes many functions such as overseeing monetary policy, issuing currency, managing foreign exchange, banker the government of India and banker of scheduled commercial banks. It also works for overall economic growth of the country.
Following the fraud in Punjab National Bank the institution has been slammed for poor governance. However, there are reasons for RBI to be aggrieved. 1. It wants more powers over regulating and restructuring Public Sector Banks (PSB). 2. RBI feels the government should not dictate over the quantum of its surplus that is paid as annual dividend to the Centre. 3. RBI is annoyed as the Centre has suggested a separate payment regulator which is against the norms of the RBI and amounts to direct interference.
RBI earns its income from lending to commercial banks, purchase and sale of government securities. When the seigniorage is surplus the RBI transfers the surplus amount to the Centre. Seigniorage is the difference between the value of notes that it prints and the cost of printing and distributing them. Annual dividend transferred to the Centre in 2016 is Rs 65876 crore. In 2017 the amount dropped to Rs 30659 crore while in 2018 RBI has paid Rs 50000 crore to the Centre. Fearing the dividend from RBI may dip further in coming years the Centre has suggested a separate payment regulator which is against the norms of RBI as an autonomous body leading the banking industry successfully even after private banks were allowed and given a level playing field. According to the RBI all payment systems fall under monetary policy, a separate payment regulator is unwarranted
RBI circular dated February 12, 2018 on Stressed Assets Resolution (wiping out bad assets of the banking system) by which it scrapped all the past restructuring mechanisms and stated if a borrower delayed payment even for a day he or she should be dragged to an insolvency court and the asset classified as non-performing asset.
The underlying fact is the money with RBI is Rs 37 lakh crore which it uses to stabilise the banking system and earns some interest on these funds. Now the Centre wants direct control of that money by invoking Section 7 of the RBI Act. This section allows the Centre to bypass the RBI Governor and issue instructions directly. So the Centre wants to take control of RBI through a separate regulator and wants to sign the cheques itself.
Centre should assess how the quantum of dividend for 2017 from RBI dropped to Rs 30659 crores. It was on account of harsh demonetisation imposed by the Centre in November 2016 whereby the banking industry came to a grinding halt for almost three months and lakhs of small businesses were shut down and migrant labourers returned to their homes. Demonetisation led to the downfall of GDP by almost 1% and steps initiated by the Centre did not yield desired results.
Should the Centre go ahead by invoking Section 7 of the RBI Act, Indian Rupee will fall drastically against US Dollar as foreign investors will start to withdraw their funds and move away elsewhere. Economy will be in chaos and the worst to suffer will be the common man.
