Meeting for the first time under new Governor Shaktikanta Das, the Central Board of the Reserve Bank of India (RBI) Friday decided to take forward governance changes in the RBI but stayed away from any controversial decisions that led to the exit of former governor Urjit Patel.
“The board deliberated on the governance framework of the Reserve Bank and it was decided that the matter required further examination,” the RBI said after the board meeting in Mumbai. The Centre had sought a discussion on governance in the RBI at the previous board meeting on November 19 and on fixing an appropriate economic capital framework.
The government, sources said, is looking for a consultative process in decision making in the RBI board to align the overall economic policy framework given the conflict with the central bank over several issues.
Aimed at empowering the Central Board, the Centre has proposed various sub-committees within the central board to look into various issues related to the banking and financial sector. Patel had stoutly opposed any changes in the governance structure and economic policy framework that would have given more access for the government to RBI’s surplus reserves of Rs 9.43 lakh crore. Currently, the Central Board has an advisory role while crucial decisions are taken by RBI officials.
On his first day in office Wednesday, new Governor Shaktikanta Das had indicated that he would prefer a consultative approach to tackle various issues. “I don’t know whether the government-RBI relationship is blocked but I feel stakeholder consultations have to go on. There have to be free, fair and frank discussions between the government and the RBI.
The government is not just a stakeholder but manages major policy decisions,” Das had said.
At Friday’s meeting, the RBI board discussed some of the issues that have become points of conflict between the RBI and the government but did not announce any specific measures. “The current economic situation, global and domestic challenges, matters relating to liquidity and credit delivery to the economy, and issues related to currency management and financial literacy. The draft report on Trend and Progress of Banking in India (2017-18) was also discussed,” the RBI said in a statement.
“The Central Board placed on record its appreciation of the valuable services rendered by Urjit Patel during his tenure as Governor and Deputy Governor of the bank,” the statement said.
Patel had resisted pressure to change policies on surplus dividend to the government, the liquidity window for finance companies and the lifting of restrictions on 11 public sector banks, which are under the prompt corrective action (PCA) framework. The latest board meeting on Friday did not make any announcement about any of these issues.
On November 19, the government and the RBI pulled back from the brink after a public spat with the central bank and the board reached an agreement on contentious issues such as providing relief to small and medium firms and easing restrictions on some of the state-owned banks to enable them to lend more.
The RBI then agreed to work out a loan restructuring scheme for SMEs for a loan exposure of up to Rs 25 crore in line with the advice of the board. The nominees of the Finance Ministry and some independent members on the Central Board pushed for various measures which were earlier stonewalled by the RBI.
On Thursday, Das called a meeting of the chiefs of PSBs to understand if there were any further steps that could be taken to lend more to the micro, and small and medium enterprises (MSME) sector, liquidity for finance companies and the effectiveness of the central bank’s February 12 circular on loan defaults, bankers said. PSB chiefs a sought relaxation in curbs on lending in 11 PSU banks.
Meanwhile, sources said the government and the RBI will soon announce the head of the expert committee to fix the appropriate capital framework — or the capital which is needed to shield or protect the central bank from future losses. Both sides have already identified the person to head the committee and there is agreement on the terms of reference, they said.
The Board for Financial Supervision or BFS is in the process of reviewing the prompt corrective action framework, which it imposes restrictions on lending on banks which have been hit by bad loans and weak capital.
Last week, the BFS had asked for inputs from RBI officials to arrive at a suitable decision. This is expected to lead to a few of the 11 PSBs being released from the PCA, which could help boost lending. Sources said that the BFS is expected to release some of the banks from the PCA framework in the wake of improvement in their operations.