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RBI, Government Step Back From the Edge After 9-Hour Meet

21 November, 2018, 17:48 | Author: Sara Gill
  • RBI-Centre standoff: Crucial meeting of central bank’s Board of Directors begins

The RBI board further "decided" to retain the capital to risk-weighted assets ratio (CRAR) at 9 per cent, as against the government's demand to reduce it to 8 per cent in alignment with the Basel framework followed globally.

"Nowhere in the world is the central bank a board-managed company".

Sources said the government and Reserve Bank of India (RBI) are looking to reach at an agreeable solution with respect to relaxation of the Prompt Corrective Action (PCA) framework and easing of lending norms for the MSME sector. Two of the most critical issues that could not be taken up in detail and had to be deferred until the next board meeting on December 14 were: systemic liquidity and governance of RBI.

According to the statement issued by RBI, the Board has advised the apex bank to consider a scheme for restructuring of stressed standard assets of Small and Medium Enterprises borrowers with aggregate credit facilities of up to 250 million, subject to such conditions as are necessary for ensuring financial stability. With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI. Sources said Finance Minister Arun Jaitley and RBI Governor Urjit Patel will take a call on the members and terms of reference of the committee to be set up within a week.

The RBI board on Monday chose to form an expert committee to examine the economic capital framework of the central bank, which will decide the number of reserves it can maintain, handing over the balance to the government. The presentations were on ECF, prompt corrective action (PCA), among other issues. The Finance Ministry had argued that the current framework was "unilaterally" adopted by the RBI in July 2017 because both the government nominees on the Board were not present during the meeting.


Earlier this month, a few media reports indicated that the government could force the central to hand over its reserves by directing it under Section 7 of the RBI Act.

The government is anxious that growth is getting affected, as 11 PSBs have curbed their lending activities due to them being put under the PCA framework by the RBI on account of high non-performing assets and negative return on assets.

The government has been urging the RBI to increase the chunk of surpluses that comes to the Centre. However, the board chose to retain the capital adequacy ratio or CRAR at 9% against 8% prescribed by Basel III norms. Besides, the RBI agreed with Gurumurthy's suggestion to allow restructuring of SME NPAs up to Rs 25 crore while banks got an additional one-year window to recapitalise their books.

The RBI has contended that this attempt by the government to dip into its reserves can adversely impact macro-economic stability. It believes that stronger capital norms are key to ensuring the strength of the Indian bank's balance sheets, especially because lenders often are wary of recognising bad loans immediately.

However, it agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, that is up to March 31, 2020.

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