DC EXPLAINS Printing notes is RBI’s prerogative
Mumbai, Nov. 19: Signalling a temporary truce, the Reserve Bank of India (RBI) and the government on Monday agreed to refer to an expert committee the contentious issue of appropriate size of reserves that the RBI must hold, while the central bank agreed to consider restructuring stressed loans of small businesses.
The setting up of the committee, whose members will be decided by the government and the RBI, followed a marathon nine-hour long meeting of the central board that discussed threadbare issues that had brought the central bank and the finance ministry at loggerheads.
“The Board decided to constitute an expert committee to examine the ECF (Economic Capital Framework), the membership and terms of reference of which will be jointly determined by the government of India and the RBI,” the central bank said in a statement.
Currently, the RBI’s capital base is `9.69 lakh crore, and independent director and Swadeshi ideologue S Gurumurthy and the finance ministry have been wanting it to be lowered in line with global practices.
The expert committee to be set up will now decide about the adequate size of capital base.
The central board headed by RBI Governor Urjit Patel, which met amid the on-going tussle between the finance ministry and the central bank over various issues, discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF).
Dr Patel and his deputies came face to face with government nominee directors — economic affairs secretary Subhash Chandra Garg and financial services secretary Rajiv Kumar — and independent members like S. Gurumurthy to arrive at a middle ground on some of the contentious issues.
According to sources, no voting on any proposal took place and a detailed presentation was made by deputy governor N.S. Vishwanathan to the board. Dr Vishwanathan is the in-charge of banking regulation and supervision.
The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to `25 crore, subject to such conditions as are necessary for ensuring financial stability.
Most of the RBI’s 10 independent directors, including Tata Sons chairman N. Chandrasekaran, attended the meeting that had drawn intense media and market attention.
With regard to banks under Prompt Corrective Action (PCA), it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of the RBI. Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders.
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.
The PCA framework kicks in when banks breach any of the three key regulatory trigger points — namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA). Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government is in favour of this practice being adopted for the domestic banking sector as well.
The Board, while deciding to retain the CRAR at nine per cent, agreed to extend the transition period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB), by one year, that is up to March 31, 2020. CCB currently stands at 1.875 per cent and remaining 0.625 per cent was to be met by March 2019, as per the deadline fixed by the RBI. According to sources, the next meeting of central board of the RBI is scheduled to be held on December 14.
Amid growing tensions with the central bank, the finance ministry had sought discussions under the neverused-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI governor.
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.
In his first public comments since the spat between the RBI and the finance ministry came out in the open,
Mr Gurumurthy had last week said the stand-off “is not a happy thing at all”.
Mr Gurumurthy, who was appointed to the board of RBI a few months back, had said the capital adequacy ratio prescribed in India is one per cent higher than the global Basel norms.
He also pitched for easing lending norms for small and medium enterprises, which account for 50 per cent of the country’s GDP. — PTI
S. Gurumurthy, the co-convenor of the Swadeshi Jagaran Manch and a recently-appointed part-time director of RBI, spearheaded a informal campaign against the Reserve Bank of India and its official directorscum-economists. He had seven prime complaints about the central bank. Deccan Chronicle speaks to Dr Subhanil Chowdhury, assistant professor at Institute of Development Studies, to understand the basis for Mr Gurumurthy’s arguments.
The bad loan problem had started in 2008 and peaked in
2014. But the RBI did not act on it in
2008 but imposed curbs in one-go in
2015 affecting banks badly.
There is no doubt that the NPA problem has started in 2008 and it peaked in 2014. It is wrong to blame the RBI alone because the government too — both the UPA and the NDA — did not come forward to support public sector banks by infusing fresh capital.
If the right to print currency was entrusted to the government and not the central bank, the liquidity issues could have been handled better.
No government prints currency anywhere in the world. It is the prerogative of the central bank. If the government is allowed to print currency at its will, it could print the currency to distribute it to voters whenever it wants to win elections. If this function was taken away from the central bank, then the government should disband the RBI.
India would have fared better if it thought independently ignoring all economic theories like Japanese Prime Minister Shinzo Abe.
If he wants all economic theories to be ignored, then somebody else should write new text books (having new economic principles) for the government to follow.
Capital adequacy ratio that the RBI mandates banks to maintain is high and should be lowered.
There is a suggestion that public sector banks and private banks should not have same capital requirements as PSBs have an added responsibility of social development. The government and the RBI have a dialogue on it and decide what is the optimal capital that the banks need to maintain. The RBI should also relax its Prompt Corrective Action regime as it froze lending by 11 banks.
The RBI’s capital should be recalibrated as no central bank holds so much capital.
The government and the RBI should together decide what is the right level of capital. But if the reports of the government’s attempt to access a part of it is true, then it is wrong because the RBI’s capital is not cash form to be transferred to the government. The value of the RBI’s capital has increased because of the appreciation of foreign currency and gold and depreciation of the rupee. So the increase is merely notional.
Demonetisation has saved the country from the United States Subprime Lending like crisis.
There for this argument.
is no
basis