Govt-RBI Tiff: Is there a Middle Way?
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Case Code: ECON070 Case Length: 17 Pages Period: 1935 – 2018 Pub Date: 2019 Teaching Note: Available |
Price: Rs.500 Organization : RBI Industry : - Countries : India Themes: Politics & Business environment |
Abstract Case Intro 1 Excerpts
Excerpts
The Role of RBI and Government in the Indian Economy - A Background
India, the fastest growing major economy in the world with a population over 1.2 billion, had become the hub for global investment. There were several factors which impacted and controlled the Indian economy. The RBI, India's central bank and one of its oldest institutions, was one of the factors behind the success of the Indian economy.
The RBI was established on April 1, 1935, in accordance with the provisions of the RBI Act, 1934. Though originally privately owned, it was nationalized in 1949 and became fully owned by the Government of India (GoI). The general superintendence and direction of the affairs of the RBI were vested in the Central Board of Directors, which consisted of 20 members. (Refer to Exhibit I for the organizational structure of RBI). The Preamble of the RBI described the basic functions of the central bank as "to regulate the issue of Bank notes and keeping of 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; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."...
Can RBI and Government Sail Through the Crisis?
The tiff between the RBI and the government started off over issues such as exempting severely indebted power companies from the February 2018 circular which identified them as bankrupt; dilution of lending norms for a bunch of fiscally vulnerable public-sector banks to extend credit to the cash-strapped small-scale sector; and, transfer of accumulated RBI reserves to the Union government to bridge its fiscal deficit gap.
The RBI’s circular of February 12, 2018, asking banks to identify projects with even a day’s default and chalk out a resolution plan within 180 days, a part of the Prompt Corrective Action (PCA), became the flashpoint. The RBI order reclassified NPAs and set new norms for loan restructuring. A new 180-day deadline was set for declaring a loan as an NPA. It said that after 180 days, the stressed account must go to the bankruptcy courts for settlement. As of mid-2018, 11 out of 21 PSU banks were on the RBI watch-list. Two of them, Dena Bank and Allahabad Bank, were also facing restrictions on expanding their business....
Exhibits
Exhibit I: The Organizational Structure of RBI
Exhibit II: The Functions of RBI
Exhibit III: PSBs NPAs in India
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