February 2018 circular created rift between Finance Ministry and RBI, says Subhash Garg

NEW DELHI: Former finance secretary Subhash Garg said the February 2018 circular issued by the Reserve Bank of India seeking to tighten the Insolvency and Bankruptcy Code (IBC) was the cause for differences between the two sides. Former RBI governor Urjit Patel’s recent book has suggested that the central bank’s bid to plug the loopholes in the IBC and tighten the screws on corporate borrowers led to his premature departure in 2018.

The government wanted the circular reviewed, Garg said in an interview to ET, adding that it had been issued without any consultation. The then finance minister had tried to discuss the matter with the central bank, he said.

“Mr Arun Jaitley — you can’t find a person better than him for initiating a constructive dialogue — tried to make that dialogue happen,” Garg said. “Unfortunately, when this did not take place, the government had to invoke something where the consultation can take place,” he said, referring to the invocation of Section 7 of the RBI Act.

Patel said the RBI and the finance ministry had been in harmony until this point.

Rejects Acharya’s contention
“The disposition with respect to the IBC or, more generally, in the conviction in the pathway, perceptibly changed – conceivably on defensible grounds – in mid-2018,’’ he writes in Overdraft: Saving the Indian Saver. “Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued. A case of our old failing of a premature pronouncement of victory, perhaps? Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency.”

The February 12, 2018, circular prescribed a one-size-fits-all approach that did not consider the specific nature of particular sectors such as power, Garg said.

“This was a prominent, major issue, you can say,” he said. “This is where it started.”

The circular tightened norms on recognition of stressed assets, scrapped other restructuring schemes and said bad loans would only be resolved under the IBC. Section 7, which had not been used before, allows the government to give directions to the RBI in matters of public interest.

He dismissed former deputy governor Viral Acharya’s contention, in his own new book, that Patel quit prematurely as RBI governor because of attempts to undermine the institution’s autonomy.

“That is the view, perhaps, of Viral Acharya. Governor Urjit Patel never said so,” Garg said. “He doesn't say this in his book as well. And, therefore, let us not take that as the truth.”

Garg was economic affairs secretary when the events leading up to Patel’s resignation unfolded. Patel quit in December 2018, citing personal reasons.

The government had taken the lead in discussions with the RBI on nonperforming assets (NPAs), Garg said.

“The government and the Reserve Bank together decided that now you have to catch the bull by the horns,” he said, adding that both sides had been united in this endeavour. “IBC was brought in and it succeeded quite a lot initially. The Banking Regulation Act was amended and the RBI was given very comprehensive powers.”

Power problem
The February circular was helpful in encouraging banks toward the IBC but differences started cropping up as the same treatment couldn’t be applied to all sectors, he said.

Garg said he took issue with Patel’s suggestion in the book that the government began having second thoughts when power companies came up for resolution.

“That is the point where I somehow I disagree with him as to what he describes and what the situation truly was,” Garg said.

The government made its best efforts with regard to resolving power company debt, Garg said, adding that a committee under the cabinet secretary was constituted to bring the states on board.

“Unfortunately, the RBI did not join that committee despite being a member of several committees of the government. That is where perceptions differed and started bringing that divergence,” he said.

When the RBI didn’t appear to appreciate the concerns of the industry and government, the companies went to court.

Section 7 had to be invoked as the government perceived the RBI to be intractable in discussing matters of import.