Tighter-than-global norms hit lending: S Gurumurthy, Independent Director, RBI Board

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New Delhi | November 16, 2018 3:16 AM

In what signalled Monday’s much-watched RBI board meet will be a stormy one despite the government toning down the rhetoric of late, RBI board member S Gurumurthy Thursday asserted that India should not go beyond what has been prescribed in the Basel capital adequacy norms.

Clearly, the government believes that the higher capital requirements mandated by the RBI constricts the banks’ lending capacity and income generation, something the economy could ill-afford at this juncture. Particularly, it wants the credit flows to MSMEs bolstered.

In what signalled Monday’s much-watched RBI board meet will be a stormy one despite the government toning down the rhetoric of late, RBI board member S Gurumurthy Thursday asserted that India should not go beyond what has been prescribed in the Basel capital adequacy norms. Delivering a lecture on ‘State of the Economy: India and the World’ at the Vivekananda International Foundation here, he said imposition of tight provisioning norms for bad loans in one go created problems for the banking system.
Gurumurthy, widely believed to be most vocal government nominee on the central bank’s board, also noted that while the global norms require the capital to risk asset ratio (CRAR) to be 8%, it is kept at 9% in India, debilitating the banks’ lending capacity. “Indian banks have less money to lend. Some people say IMF feels happy if we have 9% capital. We don’t have original thinking today,” he said. “In Japan, for the internationally active banks, capital norm is 8% and for domestic banks, it is 4%. In India, it is 9% for both,” he pointed out.

 

Recently, delivering a lecture at the XLRI, Jamshedpur, RBI deputy governor NS Vishwanathan had warned against any dilution of the capital adequacy norms for Indian banks in the name of aligning them with international benchmarks. Till the country’s insolvency and bankruptcy regime mature, Vishwanathan noted, India would need a financial-sector regulatory regime stronger than the global median.

While the government has made it clear that it wants the RBI’s economic capital framework to be reviewed, Gurumurthy said the stand-off between the RBI and government “is not a happy thing at all”. He said: “Some policy has to be worked out. As far as my understanding goes, the government is asking for formulation of a policy as to how much reserve the central bank must have. Most central banks do not have reserves of this kind (as RBI have) at all,” he said.
Clearly, the government believes that the higher capital requirements mandated by the RBI constricts the banks’ lending capacity and income generation, something the economy could ill-afford at this juncture. Particularly, it wants the credit flows to MSMEs bolstered.

The central bank is strongly resisting the government’s proposal to relax the prompt corrective action (PCA) framework for weak banks. North Block reckons relaxing the lending curbs on these banks are crucial for addressing the liquidity problem being faced by NBFCs.
Tensions between the RBI and the government have escalated recently, with the finance ministry initiating discussion under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI governor.

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