RBI board meet: Urjit Patel stays, but bragging rights go to government

Gladys Abbott
November 20, 2018

Right after the board meeting, the RBI got cracking on the decisions by announcing Rs 8,000 crore worth of open market operations to buy government securities from the market to ease liquidity. The committee will have to decide on how much of such reserves would have to be maintained and the purposes for which they should be used. The RBI backed-off from its confrontationist stand and agreed to initiate discussions on almost all the issues that the Centre had raised with the country's central bank.

The board also advised that the RBI should consider a scheme for restructuring stressed standard assets of micro, small and medium enterprise (MSME) borrowers with aggregate credit facilities of up to ₹25 crores.

Recently, S. Gurumurthy, a government-appointed director on the central bank board, underlined the need to relax norms under PCA, pointing out that India was a bank-driven economy.

This is expected to ease curbs - and so boost lending - for a few of the 11 PSU banks which have been placed under this framework. While it was speculated that a face-off with the government was on the cards, a series of closed door meetings - including one between the prime minister and Patel - ensured that such a situation was avoided. After efforts at a de-escalation, RBI chief Urjit Patel is unlikely to resign - as speculated by some reports - but sources predict a clash in the meeting over the centre's demand for a special liquidity window for Non-Banking Finance Companies (NBFCs). "The Board made a decision to constitute an expert committee to examine the 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.

Prompt Corrective Action (PCA) framework: Eleven public and one private bank in the country have been placed under what is called a PCA framework - rules the RBI puts in place for weaker banks - that bars lending, among other things, by these banks until they strengthen their capital base.

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"With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI."

Interestingly, two of the major issues were still not addressed during the meeting.

In the run-up to Monday's board meeting, finance ministry bureaucrats have argued that the capital norms that Indian banks follow are far tougher than global norms. It had transferred over Rs 65,000 crore in both FY15 and FY16. But, ultimately, the RBI has in-principle agreed to this demand. It believes that stronger capital norms are key to ensuring the strength of the Indian bank's balance sheets, especially because lenders often are wary of recognising bad loans immediately. Thus, on the issue of capital transfer, government wins the round.

The Board, while deciding to retain the CRAR at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020.

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