AN RBI CIRCULAR issued on February 12, announcing a one-day loan default norm for banks, was among the key pressure points between the central bank and the Finance Ministry leading up to last week’s rate hike, The Indian Express has learnt.

Despite repeated requests by the Ministry to relax the default norms, the central bank refused to budge. The rate hike has now ruffled feathers in the government.

According to senior officials in the ministry, relations between the regulator and the government have particularly soured over the past few months.

The two sides had squared off before a crucial Monetary Policy Committee meeting in June last year. The members of the MPC unanimously declined to meet a Finance Ministry panel for discussions on the policy a week before the review, official sources said.

Prior to that, tensions surfaced when the administration tried to reduce the central bank’s powers over managing and regulating the government debt market by amending the Reserve Bank of India Act. However, after criticism from several quarters, the government withdrew the proposed amendments from the Finance Bill, 2015.

The RBI and the Finance Ministry are also at loggerheads on the issue of banking supervision, especially on the abuse of the SWIFT messaging system.

In the wake of the alleged loan fraud at Punjab National Bank involving billionaire Nirav Modi, the Finance Ministry had hinted at the supervision and inspection framework of the RBI being either “inadequate” or not being “effectively implemented”. The RBI said that several of its warnings were not heeded.

On the February 12 circular, sources said, the Department of Financial Services first asked the RBI to relax the default norm to 30 days for a period of one year and later suggested some leeway for sectors such as power. None of its suggestions were accepted, said official sources.

“The February 12 circular of the RBI, which kicked in the one-day default norm and withdrew all its earlier instructions dealing with resolution of stressed assets, was not even marked to the DFS,” a senior official said.

“While we were in agreement with the circular in principle, its implementation should have been staggered,” said the official, speaking on condition of anonymity.

According to the new RBI rules, if the loan principal or interest is overdue for one day beyond 30 days, the account is identified as a Special Mention Account-Zero (SMA-0). If the delay is for 30-60 days, it comes under the SMA-1 category. If it is overdue for more than 60 days until 90 days, it falls under the SMA-2 category. If repayment is not made for more than 90 days, it is classified as a non-performing asset .

Through the new circular, the RBI did away with its earlier instructions dealing with the resolution of stressed assets and replaced them with the revised framework. “As soon as there is a default in the borrower entity’s account with any lender, all lenders — singly or jointly — shall initiate steps to cure the default,” the RBI said.

The RBI announced the rules to ensure transparent recognition of NPAs and to align existing rules with the new Insolvency and Bankruptcy Code. However, this led to a sharp spike in NPAs and provision requirements of banks in the January-March quarter.

On the charge of regulatory oversight in the alleged abuse of SWIFT in the PNB case, the central bank cited an incident in July 2016, 17 months before the loan scandal became public. It referred to an attempt to defraud another public sector bank Union Bank of India by abusing the SWIFT messaging system that was “salvaged post event without any apparent monetary loss”.