Letter to BS: Govt should be careful in exercising powers under Section 7

This refers to “Can govt direct central bank on policy and regulation? Yes, says RBI Act” (August 28). The Section 7 of the RBI Act 1934, as you rightly pointed out, does empower the government to issue directions to the Reserve Bank of India (RBI), after consultation with the governor, if considered necessary, in public interest. It has not been done till date. The moot question is whether the public interest will be served by issuing directions to the RBI by telling it to dilute its regulatory instructions regarding non-performing assets so as to reduce their impact on a particular section of defaulters of bank loans, in this case, defaulting power companies.

If the government were to take recourse to such directions, what will prevent this or future governments to direct the RBI to give a more favourable regulatory treatment to a particular defaulting corporate or not take regulatory action against a bank in gross violation of regulatory instructions. Consultations on the broad parameters of major regulatory instructions to be issued do take place between the central bank and the RBI from time to time. 

But the use of powers under Section 7 to help the interests of a particular section of defaulters will not be looked upon kindly by the depositors in particular and the public at large. It will be seen as a definite step towards eroding the powers of the central bank and will cause concern among international institutions like International Monetary Fund, Bank for International Settlements, and other central banks and foreign investors. So it is advisable for the government to be very careful in exercising its powers under Section 7. If public interest is not being served, it should not contemplate such a move.
 

​Arun Pasricha New Delhi

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