The Reserve Bank of India (RBI) estimates that banks will have capacity to lend an extra ₹2.5 trillion to ₹3.0 trillion (i.e $35 billion to $42 billion) over the next year. Sources said this comes after the RBI decided to relax a deadline for lenders to boost capital ratios.

The apex bank agreed, at its board meeting on Monday, to extend a deadline to March 31 so that lenders may further lift capital conservation buffers.

The relaxation will also reduce the banks' capital requirements by about ₹300 billion to ₹350 billion.

“The relaxation is a credit negative for banks,” international credit rating agency Moody's Investors Services said.

During Monday's meeting, the board advised the central bank to support small businesses and give banks more time to step up capital norms.

“The RBI has agreed at the board meeting to allow banks to restructure the stressed loans to small and medium size companies,” said sources.

NO FIREWORKS

The RBI's board meeting, usually a staid affair, came sharply into focus after top government officials pressed the RBI to ease lending and capital rules for banks, provide more liquidity to the shadow banking sector, support lending to small businesses as well as let the government use more of the RBI's surplus reserves to boost the economy.

“The broad concern that board members wanted the RBI to address was that no one should be starved of credit,” a source said.

There were no fireworks at the meeting unlike during the run-up, when strains between the government and the central bank became public, leading to speculation that Governor Urjit Patel might resign.

“Everyone was sophisticated in their behaviour and everyone participated in the discussions. All the decisions were taken with everyone's consent,” the source said.

Three topics were discussed at the meeting - lending to small businesses, capital buffers for banks and the RBI's reserve adequacy. Presentations were made by RBI as well as finance ministry officials.

The Modi administration wants to boost growth as it is concerned that low crop prices and difficulties faced by small businesses may dent its prospects in numerous state polls over the coming weeks. It would also affect its prospects in the nationwide elections due by May next year.

Seeking help to bolster the economy, government officials and one independent RBI director had called for strong actions by the central bank.

Unhappy over the persistent pressure on the RBI, Deputy Governor Viral Acharya warned last month that undermining central bank independence could be “catastrophic”.

A source said that the next meeting on December 14 will take up issues on liquidity, risk weights and capital provisioning for banks and governance of the RBI.

“The RBI, the government and the independent board members - all of us are on the same page when it comes to doing what's the best for the country. The only difference in opinion is on how and how much,” the soure added.

Related Topics
comment COMMENT NOW