Finance Minister Arun Jaitley on Sunday said minimising bad loans alone can ensure adequate credit flow to small businesses and the troubled NBFCs and also help take care of the liquidity concerns in the market, signalling a thaw in its fraught ties with the Reserve Bank. Interestingly, the latest statement from the finance minister is in fact aligns with the RBI's resolve on the issue which has been doggedly pressing for action on high non-performing assets (NPAs). The apex bank has also been averse to government demand for special dispensations for SMEs, NBFCs and the power sector to help boost growth ahead of the April-May hustings. "To maintain the strength of our banking system and to enable it to help the economy grow, we need to minimise our NPAs," Jaitley said, speaking at the 100th foundation day of the state-run Union Bank of India here Sunday evening through a video link. "It is only a strong banking system that will be able to improve credit in those sectors which really need credit. The MSME (micro, small and medium enterprises) sector needs credit, several other players in the market need credit. NBFCs today need credit because a large part of lending is done by them," he added. It can be noted that as of the March quarter, the system wide bad loans ratio had sniffed at 12 per cent, while for some state-run lenders like IDBI Bank, which has been taken over by LIC, had nearly 28 per cent of its loans as dud assets as of the June quarter. Following a massive spike in the bad loans, which got speeded up after the note-ban and the hasty implementation of the GST, the RBI had in September 2016 brought as many as 11 state-run banks under the prompt corrective action plan framework to bring down NPAs. This has led to credit crunch in the economy as these banks collectively control one-fifth of the system level credit and deposits, and the crisis was felt the most by small business units. The banking system needs to be strengthened so that it can lend to NBFCs, which will ensure that "liquidity in the markets is maintained", the minister said. NBFCs controlled more than 13 per cent of system wide credit market as of March 2018. "We have to target ourselves and our policies; the whole system has to target itself to the direction where we improve the lending ability of our banks and we improve the liquidity available as far as our markets are concerned," Jaitley said. According to reports, the government-appointed non-official director on the central board of the RBI, S Gurumurthy, had been asking for forbearance for MSMEs along with increased credit flow to other critical sectors. Also, other reports said government wants the RBI to open a special refinance window for NBFCs, mutual funds and housing finance companies which have been under strain since the defaults at the infra lender IL&FS. Jaitley, however, did not touch upon other contentious points like passing of RBI's surplus capital to government or diluting the prompt corrective action (PCA) framework for some sector like power which is partly linked to NPAs or lowering banks' capital buffers. According to sources, the three letters that government sent to RBI on October 10, under the never-before used Section 7 of the RBI Act, the finance ministry had listed out as many as a dozen demands. Some other demands include more active board by whittling down the powers of the management committee of the central board, which is peopled by the governor and his four deputies and some EDs. Jaitley limited his remarks on the NPAs and the role it can play in ensuring credit flow. "The future of our economy and its growth depends on this lending capacity," he said, adding the "immediate target" should be to strengthen the banking system that is mired with over Rs 10.5 lakh crore in NPAs which is close to 12 per cent of the overall banking assets. Jaitley said multiple options have been exercised, not many yielded results and the "experiments" being carried out now are delivering results now. "Early harvest" of the IBC is also showing positive results, he said. The minister reiterated his comments on the excessive lending between 2008 and 2014 as the reason for the high NPAs now and termed their concealment as a "fatal" error, but spared a direct mention of the RBI this time. Ahead of an FSDC meeting last month, Jaitley had blamed the RBI for "looking the other way" when banks were lending indiscriminately during 2008-14. On Sunday, Jaitley also complemented the Monetary Policy Committee (MPC) for the good work being done by it and hoped that it will continue to better on it in the future. Relations between the RBI and the Finance Ministry have soured in the last month, after the North Block started consultations under the never-used Section 7 of the RBI Act which provides for the government directing the central bank to undertake certain measures in public interest. According to sources, government has sent three letters to the RBI with nearly a dozen demands, which were replied to in a week. The poll-bound government primarily wants the RBI to help the struggling non-bank lenders get some liquidity support, liberalise the PCA norms and undertake other measures which will help push growth, while the RBI is said to be taking a conservative view and avoiding any bad precedents. The RBI's perceived excess capital has also become into a contentious issue, with one report saying government is eyeing one-third of its-Rs 3.6 trillion. Economic affairs secretary S C Garg had last week denied the amount, but said there is a discussion on "appropriate economic capital framework" for RBI underway. The central bank took its reservations on various issues public in a speech by deputy governor Viral Acharya on October 26, wherein he warned of investors' wrath if the RBI autonomy is compromised. After reports of action under Section 7 came up, the government had tried to ease tensions by stating that autonomy is "essential" and an accepted governance requirement. However, Garg had also mocked the "wrath of markets" remark by Acharya, pointing out to improvement in financial markets since the speech. The RBI board is scheduled to meet again on November 19, in what many earlier expected to be a stormy meeting.