RBI Governance: Under discussion – Board for further examination of framework

The central board of the Reserve Bank of India (RBI) on Friday discussed its governance framework and decided the matter required further examination, the central bank said in a statement on its website.

According to sources privy to the deliberations, Subhash Chandra Garg, economic affairs secretary, made a presentation at the meeting about how the governance structure for the RBI should be examined. RBI governor Shaktikanta Das, who chaired the meeting, is known to have said that he was new to the job and, hence, not in a position to respond immediately. The matter was thus reserved for the next meeting of the board.

Among other issues, the board also reviewed the current economic situation, global and domestic challenges faced by the economy, liquidity and credit flow in the system as well as issues related to currency management and financial literacy.

“The draft report on Trend and Progress of Banking in India (2017-18) was also discussed,” the statement from RBI said.

Over the last few months, the issue of governance of the central bank has turned into one of the key flashpoints, with the government favouring a framework where the role of directors on the board goes beyond the advisory. On its part, the RBI is believed to have taken the view that since some of the board members run businesses regulated by the central bank, granting them the power to direct the RBI management would amount to conflict of interest. The matter had long been on the agenda of today’s meeting and it is believed to a key reason for Urjit Patel stepping down as the RBI governor on December 10. This was the first time the board met after Das took charge as governor.

The question of liquidity crunch faced by non-banking financial companies (NBFCs), the flow of credit to small enterprises and restrictions imposed on banks under the prompt corrective action (PCA) framework were among the other flashpoints between the Patel-helmed RBI and the central government. Equally contentious has been the question of transfer of the RBI’s reserves to the government. A committee is soon expected to be set up to consider an economic capital framework for the RBI.