Mumbai: Signal-ling a temporary truce, the Reserve Bank of India (RBI) and the government on Monday agreed to refer to an expert committee the contentious issue of appropriate size of reserves that the RBI must hold, while the central bank agreed to consider restructuring stressed loans of small businesses.
The setting up of the committee, whose members will be decided by the government and the RBI, followed a marathon nine-hour long meeting of the central board that discussed threadbare issues that had brought the central bank and the finance ministry at loggerheads.
“The Board decided to constitute an expert committee to examine the ECF (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 in a statement.
Currently, the RBI’s capital base is Rs 9.69 lakh crore, and independent director and Swadeshi ideologue S Gurumurthy and the finance ministry have been wanting it to be lowered in line with global practices.
The expert committee to be set up will now decide about the adequate size of capital base.
The central board headed by RBI Governor Urjit Patel, which met amid the on-going tussle between the finance ministry and the central bank over various issues, discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corre-ctive Action (PCA) framework and the Economic Capital Framework (ECF).
Dr Patel and his deputies came face to face with government nominee directors — economic affairs secretary Subhash Chandra Garg and financial services secretary Rajiv Kumar — and independent members like S. Gurumurthy to arrive at a middle ground on some of the contentious issues.
According to sources, no voting on any proposal took place and a detailed presentation was made by deputy governor N.S. Vishwanathan to the board. Dr Vishwan-athan is the in-charge of banking regulation and supervision.
The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to '25 crore, subject to such conditions as are necessary for ensuring financial stability.
Most of the RBI’s 10 independent directors, including Tata Sons chairman N. Chandrasekaran, attended the meeting that had drawn intense media and market attention.
With regard to banks under Prompt Corrective Action (PCA), it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of the RBI. Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders.
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 PCA framework kicks in when banks breach any of the three key regulatory trigger points — namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA). Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government is in favour of this practice being adopted for the domestic banking sector as well.
The Board, while deciding to retain the CRAR at nine 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, that is up to March 31, 2020. CCB currently stands at 1.875 per cent and remaining 0.625 per cent was to be met by March 2019, as per the deadline fixed by the RBI. According to sources, the next meeting of central board of the RBI is scheduled to be held on December 14.
Amid growing tensions with the central bank, the finance ministry had sought discussions under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI governor.
COMPROMISE PREVAILS
After an extraordinary nine-hour long board of directors meeting, the RBI and the Centre appear to have agreed on taking a middle-path to find solutions to several key issues.
1 RBI’S CAPITAL: A new committee, which will have an equal number of members from the Centre and the RBI, will decide whether the government would get the prized booty of over '3 lakh crore.
2 LENDING TO MSMEs: The RBI would consider restructuring stressed loans of MSMEs who owe upto '25 crore.
3 PCA MECHANISM: This is one of crucial issue that could unblock lending by 11 public sector banks. This issue will be decided by the RBI’s 9-member Board of Financial Supervision.
4 CAPITAL NORMS FOR BANKS: Though there was a demand for easing bank capital norms, no decision was taken on it. But the RBI allowed liquidity through CCB till March 2020.
