RBI-
What is it?
RBI stands for Reserve Bank of
India. RBI regulates the issue of Bank notes and keeping reserves with a view
to securing monetary stability in India and generally to operate the currency
and credit system of the country to its advantage. It is to have a modern
monetary policy framework to meet the challenges of an increasingly complex
economy. It has to maintain price stability while keeping the objective of
growth.
What
happened- understanding the conflict?
In recent years there have been
various frauds and scams with Banks for that RBI was blamed. RBI is the sole
regulator of the banks but still it feels that it does not have enough power
over banks and decision making is compromised.
Though RBI can appoint nominee
director on bank boards and can lead to physical inspection and financial
audit. It also looks after merger of Banks.
Today Indian Banking Industry
suffers with stressed assets and non-performing assets. The regulator has
scrapped all the past restructuring mechanism and tightened the norms. Delay in
paying loans now can lead to the Insolvency Court and attract punitive
measures.
The RBI has issues PCA or Prompt
Corrective Action Framework – which restricts weak banks from lending and
this contribute to liquidity crisis as government accuses the RBI. Government
also wanted special dispensation by the RBI to help non-banking finance
companies (NBFCs) apart from relaxed norms for lending to micro, small and
medium enterprises.
Interest rates have been the
reason of conflict as well, the government wanted reduced interest rates when
oil prices were low, and inflation was not a dominant concern either. However
the Monetary Policy Committee has not reduced the interest rates.
The
working
The RBI lends money to Banks
which are commercial in nature and even it sells and purchases the government securities.
Effect
of the conflict
This is a matter of concern while
there are so many internal concerns as well as external concerns like trade
sanctions, hyper protectionisms, rising oil prices and these two Government and
RBI are fighting with each other.
Conclusion
RBI is in right place when it
placed weak banks under PCA , and it has helped in controlling the problem of
bad loans as RBI said. The government PCA diluted as it wants bank lending to
rise, and it will reduce liquidity crisis. NBFCs, Housing Finance Companies and
Micro Finance institutions suffered due to non- liquidity.
Therefore, instead of fighting
with one another there could be other ways to ease liquidity as addition to the
routine Open Market Operations.
