Govt and RBI signal truce after 9-hour marathon meeting

Mae Love
November 19, 2018

The ongoing rift with the government is set to play out at the RBI's crucial board meeting Monday, with the Finance Ministry nominees and some independent directors expected to take on Governor Urjit Patel and his team over issues ranging from MSME credit to the central bank's reserves, though both sides are in favour of reaching a common ground. The meeting is taking place as the government has sought a discussion on governance in the central bank and appropriate capital framework.

The appointment of three new directors- S Gurumurthy, Subhash Chandra Garg and Rajiv Kumar - in the RBI board is seen as government's efforts to oversee the bank's function.

Here's the statement released by the RBI after the meeting:The Reserve Bank of India's (RBI) Central Board met today in Mumbai and discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI.

"The Board made a decision to constitute an expert committee to examine the Economic Capital Framework, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI", the central bank said.

RBI Governor Urjit Patel had meet Prime Minister Narendra Modi last week in a bid to sort out differences between the Centre and the bank regulator.

According to sources, the next meeting of central board of the RBI is scheduled to be held on December 14.

MSMEs: The government wants the central bank to lend more to micro, small and medium enterprises (MSME), which have been facing issues with liquidity and were hit by demonetisation and the implementation of GST. It is believed that the RBI board will agree to not just re-examine the systemic liquidity in the economy but will also ease the prompt corrective norms (PCA) for banks that have shown improvement since they came under PCA.

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However, the central bank has been averse to the government's demand as it considers the sectors to be vulnerable.

The most contentious issue that the central bank and finance ministry locked horn was the issue of RBI's capital. "They were flexible on several issues". There are 11 public sector banks out of 21 that are on PCA.

The government and the RBI have been sparring over how much capital the central bank needs and how tough its lending rules should be.

These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. The membership and terms of reference of the committee will be decided by the finance minister and RBI governor.

On October 27, RBI deputy governor Viral Acharya delivered an unusually strong statement warning against government interference in RBI's affairs. He also pitched for easing lending norms for small and medium enterprises, which account for 50 per cent of the country's GDP. Now, while RBI has agreed for setting up of an expert committee on the economic capital framework (ECF) its mandate is restricted to future earnings and not the existing reserves, sources privy to the board deliberations told The Hindu.

"The Reserve Bank of India Governor should work in sync with the government or otherwise resign", SJM's co-convener Ashwani Mahajan had said.

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