The RBI-Government Stand-Off and Section 7 of RBI Act, 1934: All You Need To Know

Recently, RBI deputy governor Viral Acharya virtually accused the government of interfering with the working of the central bank. On the other hand, Union Finance Minister Arun Jaitely blamed the RBI for unmanageable figures of stressed assets saying that it failed to check indiscriminate lending between 2008 and 2014 causing NPA crisis in the banking industry.

It was reported that the government wrote various letters to the RBI invoking Section 7 of the Reserve Bank of India (RBI) Act, 1934, allowing it to issue directions to the RBI Governor on matters of public interest such as liquidity for NBFCs, capital requirement for weak banks and lending to SMEs. The Union Ministry of Finance clarified that “the autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement”.

Section 7 of the Reserve Bank of India (RBI) Act, 1934

The Section 7 of the RBI Act empowers the Central Government to consult and give instructions to the Governor of the RBI to act on certain issues, that the government considers serious and in public interest. The Central Government may give such directions to the Bank from time to time, after consultation with the Governor of the Bank, consider necessary in the public interest. Once Section 7 is invoked, the general superintendence and direction of the affairs and business of the Bank is entrusted to a Central Board of Directors which may exercise all powers and do all acts exercised or done by the Bank. Section 7 had never been used in independent India till now. It was neither even used when the country was close to the economic crisis in 1991 and nor in the aftermath of the 2008 recession crisis.