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Section 7 RBI Act 1934

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Section 7 RBI Act 1934

shape Introduction

The Union Ministry of Finance, on, October 31, 2018, produced a statement for the government about the autonomy of the Central Bank with the RBI Act.

According to the Ministry’s statement, the Government and Central Bank should be guided by public interests. The required resources of the Indian economy among both bodies are discussed and then final results are announced to the public.

shape RBI Act

What is Section 7 RBI Act 1934?

Section 7 of the Reserve Bank of India issues the government with an authority to guide the RBI based on public interest in consultation with the RBI governor.

This is a legislative act produced for the Reserve Bank of India that was stated in 1936. This act is meant for providing the framework in order to manage the banking sectors in India.

In the absence of RBI Governor, the Deputy Governor can have the authority of superintendence for the business banks. Also, Deputy Governor has the power to do all the things that are undertaken by the Bank.

The Indian government never used the Section 7 RBI Act before. But for the first time, the government of India used Section 7 of the RBI Act 1934 in the 83rd year of Central Bank. This statement is provided with the intention of public development.

shape History

History of Section 7, RBI Act:

The Reserve Bank of India made two provisions with the Bank of England Act 1946 and Commonwealth Bank of Australia 1945 in order to provide the power to the central government for directing the central banks.

This act also clarified that if the government fails to work according to the advice of the RBI governor, responsible actions will be taken on the government. So, the government opposed that provision at that time.

However, the Reserve Bank of India asked for more provisions from the government to accept the responsibility for the action of Section 7, RBI Act 1934.

shape Amendment

Reason for the amendment:

In the meeting of Financial Stability and Development Council (FSDC) the Finance Minister of India, Arun Jaitley holds the responsibility on RBI for the failure of a lending spree. This happened at the duration of 2008-2014 which led to the loss of 150 billion USD.

  • Officials of Securities and Exchange Board of India

  • Insurance Regulatory and Development Authority

  • Pension Fund Regulatory and Development Authority (PFRDA)

These all authorities attended the meeting of FSDC on October 30, 2018.

The issue was taken to the hearing in Allahabad High Court and the case is produced by the Power Producers Association of India facing the 12th circular of RBI.

Before the rise of this issue, the finance ministry has sent three different letters to the Central Bank. The three issues are

  • Prompt Corrective Action (PCA) for public sector banks

  • Withdrawal of PCA on Public Sector Banks (PSB)

  • Governor’s opinion on the Central Bank about the Capital Reserves

So the court informed the central government to stop the discussion with RBI based on the section 7 RBI Act, 1934.

According to the note of Allahabad High Court, the government should issue the direction to the Reserve Bank on the policy matters. Until now, the Central government never had given the directions to RBI for its regulatory issues.

Likewise, similar authority is provided to deal with the regulators like the Insurance Regulatory and Development Authority and Telecom Regulatory Authority of India.

Various Interpretations and Issues on the amendment

There are many ways to interpret this act as it was not invoked ever before. An official of the Central Government can only manage the provision of the central bank and they need not provide the directions to RBI for the policy matters.

shape Controversies

Controversies between the Government and RBI

Previous RBI Governor Raghuram Rajan left the RBI governor’s office in September 2016. Post Dr.Rajan’s exit, Urjit Patel took the Governor position of RBI and everyone believed that the struggle of RBI would end there.

Then Urjit Patel accepted the demonetization process in November 2016. Even now both Government and RBI have some controversies about few issues.

The Crisis of NPA

The government believes that the11 banks that are assigned under the Prompt Corrective Action (PCA) framework it could decrease the stress of Micro, Small and Medium Enterprises (MSMEs).

Nirav Modi-PNB Scam

The Businessmen Nirav Modi and Mehul Choksi came under the crime for dealing with several banks. They made the PNB fraud up to 14000 crores in Indian rupees.

Section 7 RBI Act 1934 , invokes the government of India to provide the necessary instructions for the Central Bank consulting with the RBI’s governor based on the public interest. This section 7 RBI Act 1934 was included in the commandment book to have a peaceful conclusion.