Jet airways crisis

What’s the tussle between RBI and the Government?

Yeah so it’s CBI vs. government and then the RBI versus government.

Ø The first flashpoint - government wants a special liquidity window for the Non-Banking Finance companies. The liquidity window or discount window would allow NBFCs to borrow money from the RBI in case of lack of funds..

Non-Banking Finance Companies are companies (NBFCs) registered under Companies Act 1956 are engaged in business of loans and advances, acquisition of stock and shares etc. They do not engage in agriculture, industrial activity or sale or purchase or construction of immovable property. The working and operations of NBFC are regulated by RBI.

Ø Secondly, the government has proposed a supervisory body for the RBI which has several of its nominees. Opposition alleges of interference by the government into internal functioning of the Central Bank which had been so far taking its own decisions.

Ø Government also wants the RBI to share its surplus (earning retained for future expenses) for developmental work.  S Gurumurthy, one of the government-nominated members of the Board, said while studies suggest that reserves could be 12 to 18.7 per cent of assets, the RBI has 27-28 per cent -- which amounts to 3.6 lakh crore. Sources said the government contended that the excess could be used for developmental work.

Ø There was also a fear that the Government might invoke section 7 of the RBI Act by which requires RBI to consult the Government for its decisions in public interest.

Ø Government has claimed that the existing framework for PCA or Prompt Corrective Action which the RBI has taken for the defaulting banks under which it had banned 11 state-run banks from taking further  loans, be relaxed as it is hurting the ‘credit flow (credit flow is the ease with which loan can be taken from a bank. High credit flow means low interest rates or prolonged repay time etc. favourable for the institutions which want to take loan). Government wants relief for these banks.

The 9 hour meeting held between the government and the RBI on 19^th Nov. had the following highlights –

Ø Central bank agreed to set up a panel for sharing surplus by restricting loans (for a higher credit flow)

Ø It would inject Rs. 8,000 crore worth of liquidity into the system through open market operations on November 22. (Open market, according to Urban Dictionary is a situation in which companies can trade freely without limits, and prices are changed according to the number of goods and how many people are buying them.

Ø MSMEs (Micro, Small and Medium Enterprises) will get concessions from the bank for restructuring their stressed standard assets. (Stressed assets = NPAs + Restructured loans +Written Off Assets

Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures. Hence, under restructuring a bad loan is modified as a new loan.

Hence, the restructured loan is also a weak loan. NPAs and restructured loans together show the low asset quality of banks. These together are hence called stressed assets.)

Ø Lending to non-banking financial companies and MSMEs was one of the key differences between the central bank and the government. While the bank took a hard line on the defaulters, the government wanted the bank to lend more to these sectors in view of the difficulties they faced during demonetization and the implementation of the Goods and Services Tax.