Marathon RBI Board Meet: Modi government, Reserve Bank of India smoke peace pipe

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New Delhi/mumbai | Published: November 20, 2018 5:09:44 AM

‘Surplus transfer’ policy under review, small relief for banks on capital adequacy, MSME package soon.

RBI Monetary Policy, Bank base rates, MCLR, MCLR system, RBI, Reserve Bank of India Reserve Bank of India’s independent member S Gurumurthy leaves after attending the central bank’s marathon board meeting, in Mumbai on Monday. (Express photo)

The much-watched meeting of the Reserve Bank of India’s (RBI) board on Monday in the backdrop of unprecedented schism between the government and the central bank saw both sides accommodating each other’s views and avoiding a public showdown that many feared. The RBI deferred the implementation of the capital conservation buffer norms under its ‘Basel-III-plus’ capital adequacy norms for banks by a year to March 31, 2020 (but it retained the capital to risky assets ratio or CRAR at 9%, 1 percentage point higher than the Basel norm) and decided to set up an expert committee to review its economic capital framework (ECF) that determines the central bank’s surplus transfers to the government.

The RBI board also advised the central bank to consider a scheme for restructuring of stressed standard assets of MSMEs for aggregate loan size of up to `25 crore. The scheme, the RBI stressed in a statement, would be subject to “such conditions as are necessary for ensuring financial stability”. The relaxation of the capital conservation buffer norm would slightly ease the pressure on the government to recapitalise banks; the planned package for MSMEs could help a section of them who have been hit hard by both the demonetisation and GST.

On the Centre’s demand for relaxation of the prompt corrective action (PCA) framework for weak banks — as many as 11 of 21 public sector banks are under this corrective regime-, the board resolved that an extant RBI panel will examine the matter. While the RBI stood its ground and refused to make any immediate dramatic change in its entrenched policy on surplus transfer to the government, it agreed to place the ECF under review by a panel whose composition and terms of reference will be decided jointly by itself and the government.

ALSO READ | RBI strikes ‘cordial note’; discusses liquidity, easing MSME credit in high profile board meet

Monday’s nine-hour board meeting held at the RBI’s Mumbai headquarters also showed the gulf between the government and RBI is not easy to bridge soon. The more intractable issue of redefining the norms for estimation of RBI’s surplus and the formula for transferring the same to the government took much of the board’s time, but the two sides stuck to their stated positions. The RBI board will meet again on December 14, where the issue of ‘liquidity crisis’ in the NBFC segment will likely feature on the agenda among other items, sources said.

Reports had earlier suggested the RBI governor Urjit Patel was contemplating to step down if the government broke convention and insisted on board directions to RBI or itself issued directions to the central bank under Section 7 of the RBI Act (the government had opened talks with the RBI under the section, causing apprehensions of directions being issued). There were also rumours that the government might want deputy governor Viral Acahrya’s scalp, given his public criticism of the government for its perceived incursions into the central bank’s autonomous regulatory space.

The board meeting was attended by all 18 directors including the economic affairs secretary SC Garg and financial services secretary Rajiv Kumar, apart form Patel and four deputy governors. S Gurumurthy, who has been critical of the RBI’s capital adequacy norms, which he saw as more priggish than required and Tata Sons chairman N Chandrasekaran were among the independent directors who attended the board meet.

Though the government seemed worried over the ‘liquidity crisis’ faced by some NBFCs, the RBI has been denying the prevalence of any serious liquidity crunch in the sector. It had highlighted that bank credit to NBFCs saw a y-o-y growth of 48% as on Sept 30 on a strong base and advised the NBFCs against relying heavily on short-term funds. On its part, the government has been nudging strong banks like SBI to buy loan assets of NBFCs.

The central bank has mandated that banks maintain CRAR of 9% (plus a capital-conservation buffer)· 1 percentage point higher than Basel norms. The RBI feels that credit growth higher than nominal GDP expansion due to supply push could result in elevated bad loans. With the insolvency regime still to mature, lower capital norms will create a false notion of banks being strong. Among the 11 PSBs under the RBI’s watch list for strained finances, two –Dena Bank and Allahabad Bank·even face restriction on lending. These stressed banks make up for 30% of deposits and 29% of advances of all the 21 PSBs.

The government has been seeking a special dispensation for boosting credit to MSMEs, which create jobs, and extend the relief on standard asset classification on MSME accounts to beyond 2019. However, it needs to tread with caution, as RBI data showed delinquencies on account of MSMEs rose to a high 13.1% for PSBs at the end of March 2018, against 12.6% a year before. As of September 28, credit to MSMEs stood at Rs 4.69 lakh crore, marginally lower than a year before.

While the government wants a special liquidity window for NBFCs to ward off any crisis following the IL&FS default, the RBI believes the crunch is not wide-spread, and that credit to NBFCs jumped 41.5% up to September 28 from a year earlier.

The Basel III capital regulation norm is being implemented in India from April 2013. According to an earlier RBI directive, it was to be fully adopted by March 2019.

Seeking a more liberal capital transfer framework, the government feels that at 26% of its assets, the RBI reserves are much higher than the median of 16% for most central banks. Experts have, however, cautioned that any move to dip into the RBI reserves is fraught with the risk of stoking inflation, as in effect it means “monetising the Centre’s fiscal deficit”.

As per the RBI’s annual accounts as of end-June, contingency fund and asset development fund aggregated Rs 2,54,919 crore, making up for 7% of total assets held by the RBI. But the perception that the RBI capital is in excess of what generally other central banks have is because of the currency and gold revaluation reserve (CGRA)–which amounts to Rs 6,91,641 crore, or 19% of the central bank’s assets–even though the gains are purely notional.

The RBI has long argued that large parts of its realised profits are anyway being transferred to the government every year; while reserves built up to meet contingencies and internal capex needs only 7% of total assets, unrealised gains (CGRA) can’t be counted for potential transfer to government.

While reports suggested that the government was eyeing as much as Rs 3.6 lakh crore from the RBI reserves, Garg had recently denied this but said that discussions were on to fix the ECF.

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