A committee to review the economic capital framework of the Reserve Bank of India is expected to be formed within a week, Finance Ministry sources said on Tuesday. The committee will look at the issue of how much capital or reserves should the RBI keep to meet all contingencies, and how much excess capital can be shared with the government.
The committee may have members from outside the government and the RBI to look into these issues, sources said. The composition of the committee will be decided jointly by the finance ministry and the RBI.
On the subject of the RBI easing its Prompt Corrective Action (PCA) norms for the banks, the Board for Financial Supervision of the RBI is expected to meet in the first week of December.
Sources said some resolution can be expected by the end of next month with some of the better performing PSU banks exiting the PCA framework which imposes a number of operational and lending restrictions on the banks.
Currently, 11 of the total of 21 public sector banks are under the framework which kicks in when banks breach any of the three key regulatory trigger points i.e. capital to risk weighted assets ratio, Net NPA and Return on Assets.
For the Micro, Small and Medium Enterprises (MSMEs), the RBI would soon announce measures to boost credit flow to this sector, sources said, adding that a scheme and guidelines have been worked out for this purpose. The RBI is expected to announce a restructuring scheme for loans up to Rs 25 crore and also ease the risk weights that banks are asked to assign on such loans. Easing of the risk weights would enable banks to lend more to the MSMEs.
According to RBI data released last Wednesday, while the overall bank credit outstanding and that to the industry segment grew by 11.3 per cent and 2.3 per cent respectively in September 2018 (over September 2017), the credit outstanding to the MSME sector – which accounts for about 45 per cent of manufacturing output in the country and nearly 40 per cent of the total exports – contracted by 1.4 per cent during the month.
“There is a need to improve the credit flow and liquidity in the markets. The measures taken yesterday directionally signal this intent and more steps will be taken,” a finance ministry official said. The RBI board’s decision to defer the implementation of capital conservation buffer (CCB) norms by one year is further expected to free up around Rs 30,000 crore of capital for the banks, which they can leverage to boost credit flow in the economy.