They say that money makes the world go round, and rightly so, as any society will cease to exist or establish a solid foundation without taking its economical aspects in mind. Ralph Waldo Emerson once said, ‘Economy does not consist in saving the coal, but in using the time while it burns.’ So what does this ‘economy’ depend on and where is it regulated from? You guessed it right, it is nothing else but our Banking System. Banks help in ensuring a steady flow of funds and proper allocation of financial resources, so that economic development and growth of the nation can be ensured. This article will help you learn all about the RBI functioning and what exactly transpires in an RBI Board Meeting.
Reserve Bank of India: An Introduction
Reserve Bank of India (RBI) is considered to be India’s Central Banking Institution which is responsible to control the monetary policy of the Indian rupee. The RBI was nationalised on January 1, 1949 soon after India’s independence. The RBI is popularly known as a ‘Banker’s Bank’ because it lends money to other banks and financial institutions when they need money for investments, lending and the likes. Commercial banks hold accounts with the RBI, wherein they are supposed to maintain a minimum amount of balance amounts in them. The RBI also lends interests to such banks though for a defined period of time, which the latter can use for further lending at higher rates or for investing which helps them earn a profit.
The RBI is a member bank of Asian Clearing Union (financial body based out of Tehran to provide a system of clear payments amongst its members), besides being a leading member of the Alliance Financial Inclusion (AFI) which promotes financial inclusions for the poorest populations. It also plays a crucial part in the development strategy of the Indian government. RBI oversees a general superintendence and direction with a 21-member central board of directors, including the Governor, four Deputy Governors, two Finance Ministry representatives (Economic Affairs and Financial Services secretaries), 10 government-nominated directors to enhance elements from the Indian economy and four directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and the capital New Delhi. These boards individually comprise of 5 members who are responsible to represent regional interests and the interests of co-operative and indigenous banks respectively.
The RBI’s reason for existence
The Board Meeting by the RBI are generally considered to be extremely inclusive and generally goes unnoticed. However, with the appointment of Mr. Swaminathan Gurumurthy, journalist and part-time director of RBI, who is looked upon as an extremely influential voice. There was a huge furore caused at his appointment amid the preexisting tensions between the central bank and the Finance Ministry.
What goes on in an RBI Board Meeting?
The Board of Directors from the Reserve Bank of India (RBI) come together every month to discuss inspection reports of banks and systemically important financial entities alongside other routine issues which demand immediate attention and vigilance. The Board has 18 members besides government-nominated 10 public representatives from different walks of life, the prominent among them being Chairman Tata Sons, N. Chandrasekaran, Bharat Doshi, the former CFO of Mahindra & Mahindra Economic Affairs Secretary Subash C. Garg and Rajiv Kumar, Secretary, Department of Financial Services.
The RBI held a marathon Board meeting on November 19, 2018 to discuss several contentious issues like the capital required by the RBI, the rules for relatively weaker banks and lending norms for SMEs (Small and Medium Enterprises). The Board meeting reached a nexus between the RBI and the government, where the former agreed that it should hold an expert committee to refer to contentious issues of appropriate sizes of reserves and restructure loans of small businesses.
RBI versus the Government
There are various issues on which the RBI and the Government cannot concur. Some of them are:
- A circular from the central bank which resulted in dragging several power companies who were defaulting on repayments and insolvency processes.
- Classification of banks as ‘weak’ and demand immediate scrutiny and corrective action.
- RBI’s reluctance for opening the liquidity tap for the NBFCs (non-banking finance companies) has not gone well with the government
- RBI’s reluctance to touch stock reserves on its balance sheet, despite transferring its full annual profits to the government as dividends in the last five years.
The Board meeting on October 23 was reported to be a stormy affair that went on for about 8 hours, and ended up discussing only 3 of the 20 items on the agenda. There was a public speech on October 26, 2018 by the Deputy Governor Viral Acharya, where he said that governments who do not respect the central bank’s independence would be incurring the wrath of the markets, which sent the RBI-government relations further downhill.
Why is an RBI Board Meeting important?
The November 19, 2018 meeting was crucial in the light of the fraught relationship between the RBI and the government and could have resulted either in resolution or lead to a point of no return. The only way out of this is for RBI and the government to reach a nexus on the current situation and future decisions.
What’s next in the RBI Board Meeting?
The November 19, 2018 meeting continued for 9 hours due to a perceived interference by the government in the central banks functioning. They eventually signaled truce on the following terms:
- RBI will form a panel on sharing surplus
- Loans of up to Rs. 25 crores to be restructured
- Issue of RBI governance, liquidity saved for another meeting.
The next RBI Board Meeting is likely to take place on 14 December.