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The crucial meeting of the Reserve Bank of India’s board of directors on Monday is expected to be a stormy affair, but is likely to push for an agreement on key issues that have caused a rift between the central bank and the Finance Ministry.
While there could be some agreements aimed at improving credit flow, the board members could make conciliatory moves on issues related to economic growth and financial stability.
In the last fortnight or so, government nominees and representatives on the RBI’s central board have publicly aired views that the central bank should relax the stringent prompt corrective action norms for public sector banks (PSBs) so that they can step up lending, open a special liquidity window for NBFCs, ensure enhanced credit flow to micro, small and medium enterprises (MSMEs), and relax capital adequacy norms for banks, among others.
PCA framework
The government is worried 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.
Further, there is a fear that due to liquidity issues facing them after the IL&FS imbroglio, non-banking finance companies may shy away from lending to micro, small and medium enterprises, which are recovering from the impact of demonetisation and implementation of the Goods & Services Tax.
“It is likely that the RBI will make concessions so that some of the PCA-affected public sector banks can get back to the business of lending, including to MSMEs, from the next quarter.
“However, opening a separate liquidity window is unlikely as better-rated NBFCs are able to tap both banks and bond markets for their funding requirements, albeit at higher interest rates. They, in turn, can lend to MSMEs. The situation facing NBFCs now is not as dire as it was during the global financial crisis (2008-09),” said a top banker.
On the issue of the government wanting to dip into the central bank’s reserves to either recapitalise state-owned banks or bridge the fiscal deficit, the RBI is against this demand as it could undermine financial stability. The board may agree on setting up a committee to formulate an appropriate economic capital framework for the central bank.
Capital prescription
Industry experts believe the RBI may examine the feasibility of doing away with the one-size-fits-all approach to capital prescription for banks.
While banks with a global presence will need to maintain higher capital in keeping with Basel-III prescriptions, they feel those with only a domestic presence could do with lower capital requirements.
Monday’s meeting will be a key test on how much autonomy the Centre is willing to give to the RBI. There is speculation that RBI Governor Urjit Patel could step down if the government nominees on the board push hard.
The Centre has ensured that it has enough voices on the RBI’s board. InAugust, S Gurumurthy and Satish Marathe, both close to the BJP, were named to the board. Last month, Nachiket Mor, who was seen to be close to the RBI, was removed.
Of the 18 board members, nine are close to the government, four are from a business background, and the other five are Patel and his four deputy governors.
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