RBI, Government Step Back From the Edge After 9-Hour Meet

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After a day-long meeting on Monday, the central board of the RBI chose to set up an expert committee to look into the ECF.

Reports of a rift between RBI and the Centre emerged in October this year.

On other issues however - such as the question of whether increased liquidity would be provided to the non-banking finance (NBFC) sector - there appears to have been no decision taken at all.

On Monday, after discussing several contentious issues during the nine-hour long board meeting, decisions were taken on four aspects: forming a committee on RBI's economic capital framework, debt recast scheme for micro, small and medium-sized enterprises, extending the deadline for last tranche of capital conservation buffer by one year and review of banks under prompt corrective action by the Board for Financial Supervision (BFS). The government also wanted norms for some banks to be relaxed so that they can lend easily and keep the economy rolling ahead of state and Lok Sabha polls. This arcane rule allows the Central to giving the banking regulator orders that it must obey.

Industry experts believe the RBI may examine the feasibility of doing away with the one-size-fits-all approach to capital prescription for banks.

The expert committee will examine the ECF, the membership and terms of reference of which will be jointly determined by the government and the RBI. The world, though, will see it as nothing short of a surrender by the country's central bank. In a late night tweet, former finance minister P Chidambaram pointed out that is an amicable compromise.

Interestingly, two of the major issues were still not addressed during the meeting. It also advised that the RBI should consider a scheme for the restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore, subject to conditions of ensuring financial stability.

"The RBI appears to have gone some, albeit not all the way, towards appeasing the government in its demands", Kotecha said. The presentations were on ECF, prompt corrective action (PCA), among other issues.

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The government is anxious that growth is getting affected, as 11 PSBs have curbed their lending activities due to them being put under the PCA framework by the RBI on account of high non-performing assets and negative return on assets.

The Centre feels that this framework could be relaxed.

The central bank appears to have kicked the can down the road on this matter.

"Nowhere in the world is the central bank a board-managed company".

No timeline has been given for a specific conclusion on this issue, with sources telling The Wire that it will be debated once again at the next board meeting in December. Presentations were made by RBI as well as finance ministry officials. However, the board chose to retain the capital adequacy ratio or CRAR at 9% against 8% prescribed by Basel III norms.

Gandhi alluded to the differences and hoped the RBI governor "has the spine" to stand up to pressure from the government.

CARE added, "The weaker banks will gain from the capital adequacy relaxation for sure".