In his newly-released book, Urjit Patel says moves to dilute a bankruptcy law caused disagreements between the government and the central bank.
The rift was triggered by a February 2018 circular issued by the RBI, which forced banks to immediately classify borrowers as defaulters when they delayed repayments, barred defaulting company founders from trying to buy back their firms during insolvency auctions, and push them into bankruptcy if a resolution timeline wasn’t met.
Urjit Patel headed the RBI between September 2016 and December 2018. He had resigned midway through his three-year term citing ‘personal reasons’. His resignation fuelled speculations about a rift between the central bank and the government. In October 2018, former RBI Deputy Governor Viral Acharya had criticised the government for alleged attempts to undermine the bank's independence.
Governments that do not respect central bank independence will sooner or later incur the wrath of the financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution, he had said.
Patel has stated in his book that the government seemed to lose enthusiasm for the legislation in the middle of the year he left the central bank. He says there were requests for rolling back the February circular and attempts were made to discredit it by suggesting it could disproportionately affect small businesses. The Supreme Court had struck down the circular in 2019.