Members make conciliatory moves; board to form committees to look into critical issues, Auto News, ET Auto

RBI has agreed to review the corrective action plan for public sector banks.
RBI has agreed to review the corrective action plan for public sector banks.

Nine-hour long RBI board meet today succeeded in reaching a consensus on a wide range of issues between the government and the RBI. According to news channel, ET Now Reserve Bank of India decided to form certain committees to specifically look into critical issues at multiple levels.

RBI board discussed the reserve issue and agreed on the formation of committees to review capital transfer. RBI is soon expected to issue a statement on today’s board meet. According to news agency Reuters, RBI will allow loan restructuring for small and medium enterprises.

There are indications that the RBI may be willing to ease lending norms for micro, small and medium enterprises (MSMEs) but liquidity to NBFCs remains a sticking point. It may also be open to injecting liquidity through open market purchases of bonds but is resisting relaxing capital buffers for banks.

According to sources, RBI has agreed to review the corrective action plan for public sector banks. The central bank also said that the bank does not have any fixed positions on it. However, RBI was categorical over its demand of government’s active role in maintaining the health of the public sector banks.

In the days leading up to the crucial board meet, government nominees and representatives on the RBI’s central board had publicly expressed views that the RBI should relax the prompt corrective action norms for public sector banks, so that they can raise lending, open a special liquidity window for NBFCs, ensure enhanced credit flow to micro,small and medium enterprises and relax capital adequacy norms for banks.

The main issues that resulted in a public spat between the RBI and the government are:

1. Prompt corrective action framework– 11 public sector banks- They have been put under PCA framework on account of high non-performing assets and negative return on assets. Therefore, banks are not being able to to lend, affecting growth.

2. Liquidity concerns facing NBFCs– Government also fears that liquidity concerns facing the NBFCs, after the IL&FS imbroglio,, they may shy away from lending to the MSME sector which is starting to recover from the impact of demonetisation and the implementation of GST.

3. Capital reserves and the economic capital framework– RBI is against government’s demand of wanting to dip into the central bank’s reserves to either recapitalise state-owned banks or bridge the fiscal deficit.

4. Capital prescription/ capital adequacy norms– Indian banks are required to maintain a minimum capital to risk weighted assets ratio of 9 per cent against the Basel requirement of 8 per cent. This ratio determines the capital that banks must set aside relative to the level of riskiness of an asset.

5. Separate payments regulator– Creation of an independent regulator Payments Regulatory Board (RRB) to deal with payments related issues. The bank maintains that regulation of payments system should remain with the central bank.

The central board currently has 18 members, though the provision is that it can go up to 21. The members include Governor Urjit Patel and his four deputies as ‘full-time official directors’, while the rest 13 have been nominated by the government, including two Finance Ministry officials — Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar.

With the inclusion of S Gurumurthy and Satish Marathe in the board, the centre has ensured that it has enough voices in the RBI board. It is said that Of the 18 board members, none are close to the government, four are from a business background, and the other five includes Urjit Patel and his four deputies.

(With inputs from Agencies)

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