RBI board meeting raises hopes of ‘inevitable’ truce

Credit to stressed MSMEs, PCA banks, ECF to be discussed

MUMBAI: The curiously awaited marathon meeting of the Central Board of the Reserve Bank of India (RBI) concluded in Mumbai late night on Monday sending signals to the markets that both the Centre and the central bank were keen to set aside their differences on key issues and get the business going.

Though conclusive decisions were still away, definitive steps were taken in proper direction on most contentious issues such as the banks under prompt corrective action (PCA), credit to stressed MSMEs, the regulatory capital norms followed by the banks and the economic capital framework (ECF) of RBI.

A statement issued by RBI after the meeting attended by 18 members said that the Board had decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Government of India and RBI. This will address the much debated issue of whether and if so, how much the RBI should transfer from its surplus to the Central Government.

Further, the Board advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs250 million (Rs25 crore), subject to such conditions as are necessary for ensuring financial stability.

The Board, while deciding to retain the CRAR at 9 per cent, agreed to extend the transition period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. This is expected to relax the pressure of higher capital requirement, to some extent.

With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI. There is a general feeling among the market observers that ultimately some banks may be released from the PCA and allowed to resume lending sooner than later.

All eyes were on how both the Centre and the RBI would tackle the issues where they had locked horns on, and where the differences were simmering by the day for several weeks.

In fact, there are many who trace the genesis of the feud between the Centre and RBI to the central bank’s ‘too strict’ February 12 circular that obviated all other schemes that were in existence in the realm of addressing the issue of NPAs.

That said, another section believes that the friction between them may have taken off with the March speech delivered by the RBI Governor Dr Urjit Patel where he stressed that the regulatory powers of the central bank should be ownership neutral – that the RBI should be able to exercise on public sector banks, the same power it is able to wield on private sector banks.

There is no denying the fact that the warnings sent by the RBI deputy governor Dr Viral Acharya last month during a speech that undermining central bank independence could be catastrophic and could trigger friction between the Central bank and the government, did take the differing views between the Centre and RBI to an irreversible level.

The issue got viral with the reports that the Centre was allegedly planning to invoke Section 7 of RBI Act to arm-twist RBI into sharing its surplus with the Centre.

 

 

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