Government for greater involvement in decision making of RBI

New Delhi: The central government wants greater involvement in the RBI’s decision making as it feels the current practice leaves it out on many critical issues like single-day default turning a loan into an NPA, sources said ahead of the crucial board meeting of the central bank.

The government feels that as the representative of the people, it should be involved in critical policy decisions made by the Reserve Bank of India (RBI), they added.

To buttress its point, the government cites that quorum for some of the sub-committees is completed by the presence of the governor and four deputy governors and not requiring any other directors to be present.

However, the central board of the RBI is headed by the governor and includes two government nominee directors and 11 independent directors. Currently, the central board has 18 members, with the provision of it going up to 21.

The board is scheduled to meet on Monday where the government is expected to push for easing of norms for lending to the MSME sector, relaxing the Prompt Corrective Action (PCA) framework for weak banks and appropriate size of reserve to be maintained by the central bank, among others.

Sources also said the government and Reserve Bank seem to be veering around to reach an agreeable solution, particulary with respect to relaxation of PCA framework and easing of lending norms for the micro, small and medium enterprises (MSMEs).

PCA framework issue

The issue of relaxation of PCA framework would be reached in the next few weeks, if not in this board meeting, added sources. As a result of the relaxation, some banks may come out of the PCA framework by the end of the current fiscal. Out of the 21 state-owned banks, 11 are under the PCA framework.

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).

The RBI is also likely to agree to easing of lending norms for MSMEs, including strict rating criteria, to improve credit flow to this sector, sources said. Besides, the central bank is expected to consider special dispensation for the MSME sector and non-banking financial companies (NBFCs) which have been facing liquidity issues.

The government feels that MSMEs, which employ about 12 crore people, play a critical role in the economy, and the sector which was hit by demonetisation and implementation of the Goods and Services Tax (GST) needs some support. However, the central bank has been averse to the government’s demand for special dispensation for MSME and NBFC sectors as it consider them to be vulnerable.

Last week, Finance Minister Arun Jaitley said there is a need to minimise NPAs in order to maintain the strength of the banking system and enable it to help the economy grow. It is only a strong banking system that will be able to improve credit in those sectors which really need credit, the Finance Minister had said, adding, “The MSME 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.”

Centre’s move may escalate feud with RBI ahead of board meet

The centre has proposed changing rules for closer supervision of the Reserve Bank of India, people with knowledge of the matter said, a move that may undermine investor confidence in the world’s fastest-growing major economy, as per a Bloomberg report.

The move is meant to empower the regulator’s board, which includes government nominees, and give it a supervisory role, the people said. The central bank’s board is scheduled to meet on Monday. The tension mirrors central bank fights playing out in countries as varied as the US and Turkey, and is a symptom of what happens when an era of easy credit ends.

The latest proposal may heighten tensions between the finance ministry and the central bank, which have been at logger heads over a host of issues that will be discussed at Monday’s meeting including transfer of surplus funds, easing of bad loan norms, and ensuring liquidity to the shadow-banking sector. While the government says the central bank isn’t providing support to boost growth, the RBI says fund transfers could undermine its independence and hurt the markets.

“This does look scary and comes at a slightly anxious environment for investors,” Hugo Erken, senior economist at Rabobank International in Utrecht, the Netherlands told Bloomberg. “This does not bode well in the short term for confidence and the Indian rupee,” he added.

(With inputs from Agencies)