GOVT VS RBI: UNEASY TRUCE
When the board meeting of the Reserve Bank of India (RBI) ended on November 19, there was a sense of relief in various quarters. The meeting was expected to be stormy, given that several points of contention between the central bank and the government were to be raised. However, as a terse note from the RBI after the marathon nine-hour meeting seemed to suggest, the central bank yielded ground and seemed to have relented on the government’s key demands.
One of the issues discussed before the 18-member board was the government’s demand for the transfer of RBI’s reserves, estimated at Rs 3.6 lakh crore. This has been a contentious issue, and was central to a much-debated speech by RBI Deputy Governor Viral Acharya last month, where he drew the example of a conflict between Argentina’s government and its central bank to caution that government interference would invite “the wrath of the markets”. But for a government keen to maintain its fiscal discipline close to the general election amid uncertain oil prices and a rising rupee, it was critical to be able to dip into the RBI’s resources to bridge the fiscal deficit. The RBI will constitute an expert committee to examine its economic capital framework, the membership and terms of reference of which will be jointly determined by the government and the central bank.
“The debate on the economic capital framework cannot be a subjective one, and both sides need to start talking on how much a central bank should hold,” says Ashvin Parekh, a banking consultant. They need to arrive at a level of surplus that offers comfort to both the regulator and the economy, he adds. At the same time, he was critical of setting up new committees on the matter. “The tendency to form committees is a nice arrangement to pass the buck,” he says.
With regard to the government’s demand to ease the RBI’s prompt corrective action (PCA) norms, where lending restrictions have been placed on 11 public sector banks that had a high level of bad loans, the bank has agreed to have the matter examined by its Board for Financial Supervision. The RBI had wanted to focus on recovering loans first, as the financials of these banks were very weak. “There is substance in both sides of the argument,” says Parekh. “You can have a middle path, and say, ‘we are not insisting that all the recovery is made, but there needs to be a certain order in recovery and a certain order in governance’. This may happen now since both the sides have agreed to listen to each other,” he adds. Karthik Srinivasan, the group head of financial sector ratings at ICRA, says there is a possibility of banks exiting faster from the PCA framework.
The RBI board has recommended a scheme to restructure the stressed assets of MSMEs (micro, small and medium enterprises) with aggregate credit facilities of up to Rs 25 crore. But experts say this is a bad idea, since the extent of recovery is largely dependent on the liquidity in the system. Much of the non-performing assets in the banking system are from such small firms, and can balloon further. This was why the RBI has been reluctant to consider any loan recast scheme for small units. While the board has not come up with a special window for non-banking financial companies where liquidity has dried up following the IL&FS debacle, it has liberalised the implementation of the capital adequacy norms under the Basel regulatory framework. While the capital to risky assets ratio (CRAR) has been retained at 9 per cent, the board has extended the transition period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB) by one year to March 31, 2020. CRAR is a measure of the capital requirements of a bank, expressed in relation to its risky assets (mainly loans) profile. The CCB is the additional capital banks have to own beyond the mandatory minimum capital requirements, and the easing of the transition norms will come as a relief to banks.
The RBI board did not discuss the governance structure of the central bank. This and the issue regarding NBFCs are likely to be taken up at the board meeting on December 14.
The government, keen to maintain fiscal discipline close to the polls, wants to dip into the RBI’s resources to bridge the fiscal deficit