Former Reserve Bank of India (RBI) governor Urjit Patel, who resigned nearly two years ago, opens up about his rift with the government in his book Overdraft: Saving the Indian Saver. Patel notes that attempts to dilute a new bankruptcy law caused disagreements between the federal government and the central bank.
A circular issued by the RBI in February 2018 that forced banks to immediately classify borrowers as defaulters when they delayed repayments led to the rift. The circular also barred defaulting company founders from trying to buy back their firms at insolvency auctions.
“Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued,” Patel wrote.
“Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency.”
Patel said there were requests to roll back the February circular and “a canard was spread” to discredit the guidelines, including an ‘incorrect’ argument that small businesses would suffer greatly. The government had felt the implications of the circular were harsh to the small industries, which were struggling under the impact of demonetization of high-value currency notes and the goods and services tax.
His successor Shaktikanta Das last year eased rules to give lenders 30 days to review a delinquent account and a further 180 days to implement a resolution plan. It also lifted the deadline to push defaulters into bankruptcy.
Patel was appointed central bank governor after the the departure of Raghuram Govinda Rajan in June 2016. The bank and the government got into a tussle over interest rates. While the Reserve Bank wanted to keep interest rates unchanged or increase them, the government was keen to lower them to boost spending.
The RBI was also at loggerheads with the government over the size of the central bank’s reserves and its refusal to provide relief to shadow bankers that were grappling with a cash crunch after the collapse of the market leader Infrastructural Leasing & Financial Services. The government had later appointed a board, headed by well-known banker Uday Kotak, to restructure IL&FS and its 169 subsidiaries.
Nearly six months after Patel resigned, his deputy Viral Acharya also resigned. The former RBI deputy governor had sparked controversy when he made public his views on the differences between the RBI and the government. At a public function he lamented that Prime Minister Narendra Modi’s government was not respecting the central bank’s independence and warned of disastrous consequences.
Using a cricket analogy, he had compared the government’s economic policies to a T20 cricket match (a short format of the game lasting a few hours), in contrast to the long-term planning of a central bank, which he called a Test match (which lasts five days). This ruffled many feathers in the government.