On November 19, Reserve Bank of India Governor Urjit Patel has convened a meeting of the RBI Central Board of Directors that will discuss issues including liquidity for NBFCs, credit for small businesses, and a new economic capital framework under which the government seeks higher transfers from RBI reserves.
The government appoints the Board in accordance with the RBI Act of 1934. The full strength of the Board is 21, including the Governor and a maximum of four deputy governors. The Board is required to meet at least six times a year and at least once every quarter. The tradition is that it meets in Delhi at least once, when the Finance Minister addresses the full Board after presenting the Budget for the coming year and outlines the government’s economic philosophy behind the policy initiatives proposed. Besides Delhi and Mumbai, the Board generally meets in various state capitals.
What is its current composition?
At present, the Central Board has 18 members, including five official directors —Governor Urjit Patel and four deputy governors, N S Vishwanathan, Viral Acharya, B P Kanungo and Mahesh Kumar Jain. The RBI Act allows for a five-year term for the Governor and the deputy governors, but it can also be less. Raghuram Rajan was given a three-year term, and did not get an extension. Patel has been given a three-year term, which can be extended by another two years.
Subhash Chandra Garg, Economic Affairs Secretary, and Rajiv Kumar, Financial Services Secretary, are the government nominees.
The four directors representing the Local Boards (one for each region) are Revathy Iyer, former Indian Audit and Accounts Service officer; Sachin Chaturvedi, Director General, Research and Information Systems for Developing Countries, an autonomous policy research institute based in Delhi; Dilip S Shanghvi, Managing Director of Sun Pharmaceutical; and P K Mohanty, a former IAS officer who is now the Economics Chair Professor, University of Hyderabad. Seven more directors appointed by the government are Satish Kashinath Marathe, S Gurumurthy, N Chandrasekaran, B N Doshi, Sudhir Mankad, Ashok Gulati and Manish Sabharwal. These non-official part-time directors were appointed between March 2016 and August 2018. They enjoy a term of four years.
Who are appointed, and how?
There is no particular checklist the government has to tick in deciding nominations to the Board. Part-time, non-official directors are chosen by the political executive. The proposal for appointment to the Central Board is moved by the Department of Financial Services under the Finance Ministry and needs to be approved by the Appointments Committee of the Cabinet. Generally, the government would want the RBI to be sensitised to the views of various stakeholders in the country’s socio-economic landscape such as businesses (within that, manufacturing, infrastructure and services sectors), cooperatives, self-help groups, academicians, economists, etc. Given that RBI plays a much larger role than just that of a banking regulator, and that it is an apolitical institution, the government generally avoids appointing individuals with strong ideological or political views to the Central Board.
Does the Governor have a say in Board appointments?
The government is not obliged to seek the Governor’s views or his concurrence on directors it seeks to appoint. But traditionally, Finance Ministers informally speak with the Governor on their choice before taking the proposal to the Appointments Committee of the Cabinet (ACC). Former Finance Minister Yashwant Sinha says he always consulted with then RBI Governor Bimal Jalan on such appointments. A former Finance Secretary, who has been a government nominee on the Board, says such consultations always happened, but never on files. A former RBI Governor says names were also suggested by the RBI to the government, which the Finance Minister accepted, to be later approved by the ACC.
What has been the role of Board so far?
At meetings, Board members brought different perspectives to the table. In the past, government nominees did not consider it a must to attend all Board meetings. The de facto role of the part-time, non-official directors had always been to provide advice and be a sounding board to the RBI Governor and his deputies. A former part-time, non-official director who served for four years — two years each with two Governors — in the Board says both paid heed to different views. “I saw a transition of governorship from D Subbarao, a perfect gentleman, soft speaker and a good listener, to Raghuram Rajan, who was very open and outspoken. He (Rajan) would draw in Board members who remained silent. For example, he would say, “Ela behen (Ela Bhatt of SEWA), what are your thoughts on this?” They wanted to understand the impact on interest rates and inflation at the grassroots level, because it hit the common man the most. The Governor seeks advice of the Board, but finally it is his decision. On interest rates, of course, it is the monetary policy committee that takes a call.
What are the Board’s other functions?
The Committee of the Central Board meets every week. Generally, Board members who are in Mumbai attend it. It basically reviews the statistics in RBI’s weekly bulletin. Two key sub-committees that are chaired by the Governor are Board for Financial Supervision (BFS) and Board for Payment and Settlement Systems (BPSS). The BFS meets every month and includes deputy governors as ex-officio members and four other directors. It undertakes supervision of banks, financial institutions and NBFCs. The BPSS takes care of paper-based and electronic systems such as NEFT and RTGS. There are other sub-committees on information technology, building, audit and risk management, and HR management.
Why didn’t the Central Board meetings make news earlier?
These used to be largely uneventful. Besides listening to views of directors representing various segments, nothing much was discussed besides general superintendence and internal working. They were only as exciting as, for example, bland statements like “the Board reviewed the current economic situation, global and domestic challenges and other specific areas of operations of the Reserve Bank of India” — a standard sentence in earlier press statements. The RBI eventually stopped issuing the customary press release after the 563rd meeting of the Board on February 11, 2017. The October 23 meeting (the 574th), however, was not one of those uneventful ones. The government-appointed non-official directors in the current board have been vociferous making strong arguments on behalf of the government, and often at variance with the RBI’s own prudential philosophy.
Do all directors have voting rights?
Generally, things do not come to such a pass that voting is required. But since the RBI Act has provided guidelines on who can and cannot vote, it may be said that such a situation has been envisaged. The Act specifies that the deputy governors and the government nominees may attend any or all meetings of the Central Board, but are not entitled to vote. This means that in the current Board, the four deputy governors and the two secretaries from the Ministry of Finance cannot vote. In the event of equality of votes, the Act states that the Governor has a second or casting vote.
Can the Board prevail upon the Governor on contentious issues?
This question is crucial because the government has already invoked Section 7 of the RBI Act and sought consultation with the Governor on certain issues it considers necessary in public interest. Two former Governors The Indian Express spoke to said that veteran chartered accountant Y H Malegam, who has been on the RBI Central Board for over two decades, presented the most accurate interpretation. In an interview to CNBC-TV18, recently, Malegam said: “Under the Reserve Bank Act, in Section 7, there are two sub-sections. One sub-section says that the Board has the responsibility to superintend and generally look after the affairs of the bank. There is a second sub-section which says that subject to regulations which the Board may provide, the Governor or in his absence any deputy governor which he nominates has the same powers. So, in effect, therefore, both have the powers to superintend and look after the affairs of the bank. Now if the Board has to give some directions to the Governor, it can only do so on the basis of the first part of that sub-section which says subject to the regulations which the Board makes in accordance with the Act. Those regulations which are there in Section 58 of the Act, have a process.
It says that the Board can make regulations with the prior approval of the government by notification in the official gazette and then after this notification is done, within 30 days or so, that notification has to be placed before parliament and both houses of Parliament have to approve that or can modify that. So, this is the whole process which has been laid down. Therefore, the Board cannot suo motu direct the Governor to do something. If it wants to do it, it would have to go through this whole process. At the moment, I am not aware of any regulation which says that they can direct the Governor to do something which is concerned with monetary policy.”