With ‘creative tension’ between them getting exacerbated, the government is now likely to press for more accountability from the Reserve Bank of India after the imbroglio at Punjab National Bank (PNB) and IL&FS.
Given the system-wide ramifications of the ₹13,000-crore Letter of Undertaking (LoU) scam at PNB and the defaults on loan obligations by debt-laden IL&FS and some of its subsidiaries, the government may now want a thorough examination of the central bank’s inspection apparatus, which apparently, missed signs of trouble at these large financial intermediaries during annual financial inspections.
“Maintaining financial stability is one of the mandates of the RBI. When central bank officers are found wanting in discharging their duties, including those related to inspection, they should be hauled over the coals. Responsibility and accountability should go hand-in-hand,” said a top executive at a public sector bank.
Further, industry players say the government may want the RBI’s inspection mechanism revamped so that financial stability is preserved.
Inspection machinery
According to reports, the Comptroller and Auditor General of India, Rajiv Mehrishi, recently questioned the role and responsibility of the central bank when banks were lending huge amounts. Some of these big-ticket loans later turned sour.
It is in this context that the central bank may go in for a complete overhaul of its inspection machinery.
The differences between the RBI and the government got magnified after Viral Acharya, Deputy Governor, cautioned that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts, who invest in central bank independence, will enjoy lower costs of borrowing, the love of international investors, and longer life spans”.
Worried over growth getting impacted, North Block mandarins have been requesting the central bank, among others, to give the 11 weak public sector banks a breather from the stringent prompt corrective action framework. This will enable them to lend to crucial segments of the economy and ease up on the revised stressed assets framework that requires banks to report even one-day default and draw up resolution plans.