Former finance secretary Subhash Garg has said that the February 2018 circular issued by the Reserve Bank of India (RBI), seeking to tighten the Insolvency and Bankruptcy Code (IBC), caused differences between the central bank and the finance ministry.
The Centre wanted the circular reviewed, Garg told The Economic Times, adding that it had been issued without consultation.
The then finance minister Arun Jaitley had tried to discuss the matter with the RBI, Garg 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 told the newspaper.
"Unfortunately, when this did not take place, the government had to invoke something where the consultation can take place," he said, referring to invocation of Section 7 of the RBI Act.
In his recently published book, former RBI governor Urjit Patel had also spoken about the IBC, stating that it was a cause of disagreement between the central bank and the government.
Also read: Review | Urjit Patel book no tell-all; it is strictly for students of Indian economy and bankingAccording to the RBI's February 2018 circular, banks were required to immediately classify borrowers as defaulters when they delayed repayments. The circular also barred founders of defaulting companies from trying to buy back their firms during insolvency auctions.
Garg told the newspaper that the circular was issued without any consultation and did not consider the specific nature of particular sectors such as power.
"This was a prominent, major issue, you can say," he said. “This is where it started".
Former RBI deputy governor Viral Acharya, in his book, has stated that Patel's resignation in December 2018 was due to attempts to undermine the RBI's autonomy.
Also read: Viral Acharya in new book: Urjit Patel's exit caused by govt attempts to undermine RBI autonomy
Responding to this, Garg said: "That is the view, perhaps, of Viral Acharya. Governor Urjit Patel never said so."
“He doesn't say this in his book as well. And, therefore, let us not take that as the truth," Garg added.