RBI softens on Centre’s call to share surplus: Key details from the Monday meet

New Delhi: In the high stakes meeting between government and the Reserve Bank of India (RBI), it seems that both the camp have ironed out their differences for the time being, with a display of flexibility on a number of issues – that were considered flashpoints for the concerned parties.

In a nine-hour meeting at the RBI headquarters, the central bank’s board decided to constitute an expert committee to examine the economic capital framework (ECF) of the central bank. The membership and terms of reference of this committee would be jointly decided by the government and the RBI.

The next board meeting is scheduled to be held on December 14 that will discuss the agenda items related to liquidity in non-banking financial companies (NBFCs) and ‘governance in the RBI’, sources said.

Here are 10 major developments from the meeting:

  • In a statement after the meeting, the Reserve Bank said the Board has decided to examine the Economic Capital Framework – the amount of surplus reserve a bank holds to tide over risks — “the membership and terms of reference of which will be determined by the Government of India and the RBI”.
  • The volume of excess reserves was one of the key points of differences between the government and the Bank. S Gurumurthy, one of the government-nominated members of the Board, said while studies suggest that reserves could be 12 to 18.7 per cent of assets, the RBI has 27-28 per cent — which amounts to 3.6 lakh crore. Sources said the government contended that the excess could be used for development.
  • To provide relief to the Micro, Small and Medium Enterprises — which employ 12 crore people — the board advised the bank to consider a scheme for “restructuring of stressed standard assets” of borrowers with aggregate credit facilities of up to Rs. 25 crore, the RBI said. Under this, MSMEs in financial difficulties will get concessions from the bank.
  • Lending to non-banking financial companies and MSMEs was one of the key differences between the central bank and the government. While the bank took a hard line on the defaulters, the government wanted the bank to lend more to these sectors in view of the difficulties they faced during demonetization and the implementation of the Goods and Services Tax.
  • On banks listed for Prompt Corrective Action or PCA — a set of rules that come into action when ailing banks breach regulatory requirements — it was decided that the matter will be examined by the RBI’s Board for Financial Supervision. Contending that the existing framework of PCA is hurting credit flow, the government wanted the regulations eased.
  • “The board, while deciding to retain the CRAR (Capital to Risk (Weighted) Assets Ratio) at 9 percent, agreed to extend the transition period for implementing the last tranche of 0.625 percent under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020,” the statement further said.
  • This could provide relief to banks that have massive bad debts and a low capital base. RBI has barred 11 state-run banks from lending and demanded that they shore up their capital base, which was another area of concern for the Centre.
  • On Monday, Congress chief Rahul Gandhi tweeted: “Mr Modi and his coterie of cronies, continue to destroy every institution they can get their hands on. Today, through his puppets at the #RBIBoardMeet he will attempt to destroy the RBI. I hope Mr Patel and his team have a spine and show him his place.”
  • There have been allegations that the government, keen on boosting economy in an election year, had asked the bank to part with a part of its surplus reserves. The Congress had said the amount could hover around Rs. 1 lakh crore.
  • There were apprehensions that the government would invoke Section 7 of the RBI Act, a little-known never-used act that empowers the government to consult and give instructions to the central bank chief citing public interest.