Why did the RBI governor resign?
This was a news story that shook the entire nation. Urjit Patel served as the RBI governor for 2 years from 2016–2018 and resigned as a mark of protest against the increasing tensions between finance ministry and RBI.
Handpicked by BJP itself, its surprising that he resigned in just two years, the shortest ever. The opinions they had varied on the following topics: liquidity, credit flow and controls governing weak banks.
Rumours are that the Government wanted money to help fund fiscal deficit which is when the total expenditure exceeds revenue. However, RBI refused to this, preserving their long-term financial stability. It is also said that the Government wanted to relax the actions taken based on PCA framework on 11 Government sector banks where 70% belongs to the Government as stringent norms hurt credit growth.
PCA framework is Prompt Corrective action to be taken by RBI when the bank’s financial conditions worsen below certain limits determined by the following parameters, Capital to risk-weighted asset/Capital adequacy ratio(CAR) which should be greater than 9 %, net non-performing assets (NPA) which should be less than 10%. NPAs are basically loan not paid for more than 3 months. Note that net NPA = Gross NPA — Provision (allowance for doubtful accounts).
NPA checks are easily manipulated by paying the amount just a day before it becomes an NPA and then issuing it again in two days thereby escaping error in the audit.
Other trigger points are Return over assets and leverage ratios such as debt, equity, assets and interest.
Special refinance windows were expected for mutual funds which are an investment programme professionally managed and for NBFC ie non-banking financial company which is more relaxed for foreign portfolio investors.
It is believed that the Government focused on hedging requirements towards short-term goals of economic growth rather than for the longer good. Since it was brought under section 7 which enables the Government to issue directions directly to RBI, they had to follow which Patel refused to and therefore resigned. It is to be noted that Arun Jaitly is the finance minister now.
It is indeed distressing as Patel was brilliant in his work and used Insolvency and bankruptcy (IBC) code for the betterment of various banks. He has been replaced by Shaktikantana Das now.
It is however surprising that no changes have been made in the policy released after the resignation under the new governor. The repo rate is said to be maintained at 6.5% as it was, the year before. Repo rate is the rate at which RBI can issue money to banks if there is any shortfall of funds.
