RBI board meet strikes a middle ground

Daniel Fowler
November 20, 2018

The Reserve Bank of India (RBI)'s board is meeting in Mumbai today in the middle of an unprecedented public feud between the government and the central bank, which alleges attempts by the centre to undermine its autonomy.

On the issue of the Economic Capital Framework (ECF), the board made a decision to constitute an expert committee to examine the ECF structure, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI.

Getting the RBI to agree to its demands will help Prime Minister Narendra Modi's government meet budget goals by using a part of the central bank's reserves, and kick-start lending by weak banks to keep the economy firing ahead of an election next year.

The government on November 9 had said it was discussing an "appropriate" size of capital reserves that the central bank must maintain but denied seeking a massive capital transfer from the RBI. The board advised that the scheme should be subject to such conditions as are necessary for ensuring financial stability.

As a result of the relaxation, some banks may come out of the PCA framework by the end of this fiscal.

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.

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With the two parameters eased, the government expects some of the 11 state-run banks that are now under PCA to come out of the framework and to expand and lend faster.

Similarly, the MSME credit recast concession is not a big one considering the demand from the Centre was for easier NPA norms for the sector and more credit flow. The government had recently invoked the never-before-used powers falling under section 7 of the RBI Act to direct the RBI Governor on matters of public interest.

There are indications that the RBI may be willing to ease lending norms for micro, small and medium enterprises (MSMEs) but liquidity to NBFCs remains a sticking point.

RBI deputy governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be "potentially catastrophic" for the economy.

Rao said it's a good news from RBI that for all the banks the capital conservation buffer deferment gives an advantage. Government sources told IANS that the RBI said that inflation was under control, and that it had taken no measure to tighten liquidity in the system.

The Congress has accused the Modi government of destroying every institution in the country and the latest one being the Reserve Bank of India.

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