RBI autonomy debate

Government wants to ease lending norms for facilitating MSMEs. RBI want to continue banks clean-up efforts instead.

Government wants to setup an independent Payments Regulatory Board. RBI wants it under its own purview.

Government and RBI differ on classification of NPAs.

Reserve Bank of India (RBI) said there is no case for having a regulator for payment systems outside the central bank.

The RBI had submitted a dissent note, against certain recommendations of the inter-ministerial committee for finalization of amendments to the Payment & Settlement Systems Act, 2007.

The draft Payment and Settlement System Bill, 2018 had made an important observation. It said that an independent payments regulatory board (PRB) needs to be established to regulate the payments sector aimed at fostering competition, consumer protection, systemic stability and resilience in the payments sector.

However, according to the RBI’s dissent note, the central bank believes that the PRB must remain with the central bank and headed by the RBI governor. The RBI and the government may nominate three members each to the board, with a casting vote for the governor.

RBI had cited the report of the Ratan Watal Committee on digital payments as recommending the establishment of the PRB within the overall structure of the RBI, arguing therefore that there is no need for any deviation.

In support of its stance, the RBI stated that the activities of payments banks come well within the purview of the traditional banking system, which the central bank oversees as the overarching financial regulator.

Thus, according to this logic, it might make better sense to have the RBI oversee the activities of payments banks as well instead of creating a brand new regulator for the growing industry.

The RBI, in essence, is pointing to the interconnection between the payments industry and the banking system to back the extension of its regulatory powers.

In conclusion, the RBI’s case makes good sense when seen from the perspective of the cost of regulatory compliance.

Also, there is the real risk that a brand new regulator may be unable to match the expertise of the RBI in carrying out necessary regulatory duties.

The RBI is an entity independent of the government as it takes its own decisions. However, in certain instances, it has to listen to the government.

This provision in the RBI Act is contained in its Section 7 which says:

Thus, it is clear from the above that this section empowers the government to issue directions in public interest to the central bank, which otherwise does not take orders from the government.

It is important to note that Section 7 has never been used till now.

It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 global financial crisis.

Importantly, it is not clear how this Section operates since it has never been used.

He explains his understanding of RBI autonomy under three functions. These functions are:

In the case of the first, he believed in total freedom; on the second, he preferred prior consultation with the mandarins in North Block; and on the third, he worked in “very close coordination” with the government.

The recent statement put out by the government underlines that the RBI is autonomous but within the framework of the RBI Act.

It is thus clear that the central bank cannot claim absolute autonomy.

It is autonomous within the limits set by the government and its extent depends on the subject and the context.

It is important to note that in a democracy, it is unthinkable that we will have an institution that is so autonomous that it is not answerable to the people.

Experts point out that the risk of such an institution is that it will impose its preferences on society against the latter’s will, which is undemocratic.

Option of Section 7 is certainly available to the more powerful side; but it is important to note that Section 7 is a deterrent never to be used.