The Government and the Reserve Bank of India on Monday pulled back from the brink after a public spat over the last few weeks with the central bank and the board reaching an agreement on providing relief to small and medium firms and easing lending restrictions on some state-owned banks.
At the nine-hour board meeting, one of the longest in recent years, the RBI 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 board advised that the scheme should be subject to such conditions as are necessary for ensuring financial stability. The RBI was earlier unwilling to consider any loan recast scheme for small units as the banking sector is already reeling under the impact of a huge pile of bad loans.
An existing committee of the RBI, the Board for Financial Supervision (BFS), will now review the Prompt Corrective Action or PCA framework — which imposes restrictions on lending on banks which have been hit by bad loans and weak capital.
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. 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.
Explained: The reserves in Reserve Bank
The board also decided to form an expert committee to fix the appropriate capital framework or the capital which is needed to shield or protect the central bank from future losses.
This will be applicable for Govt and RBI break the ice, central bank agrees to help ease lending to small business future capital and not for the past. The Economic Capital Framework which was in place over the last four years will be reviewed, sources said. Besides, banks are expected to get a boost with the easing of norms on the Capital Conservation Buffer which is the extra capital banks hold above their mandatory capital and in terms of pushing back the deadline for transition to the globally recognised Basel norms by one more year — to end of March 2020.
Clearly, efforts at top levels of the government to dial down the tension appear to have worked after the government invoked for the first time a provision in the RBI law, Section 7, to open a formal discussion with Governor Urjit Patel on these issues.
Sources said Patel was in touch with Finance Minister Arun Jaitley even on Friday leading to both sides finding a common ground on key issues after an earlier meeting with the Prime Minister. With a lot of time taken on settling some of these issues, including a presentation on capital and reserves, some of the other issues on the agenda — such as liquidity for Non Banking Finance Companies or NBFCs and governance in RBI will now be discussed at the next board meeting December 14.
On the issue of the Economic Capital Framework (ECF), the board decided to constitute an expert committee to examine the ECF structure, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI.
The view of some of the directors on the board is that the RBI is holding excess reserves and that the government — which is the owner or the sole shareholder — should receive a larger share of the surplus or dividend. While the government thinks the RBI has “excess capital” in its reserves and wants the central bank to transfer more money to it as part of the surplus, the RBI contends that it needs to have a stronger balance sheet to deal with a possible crisis and external shocks.
On the issue of capital for banks, Government nominees and an independent director argued for 8 per cent capital in line with the Basel recommendations. The RBI Board, while deciding to retain the capital adequacy requirement at 9 per cent, agreed to extend the transition period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB) by one year — up to March 31, 2020.
The RBI has insisted on retaining the 9 per cent capital for banks. The government nominees are said to have argued that the priority at this juncture was to boost credit flows to small and medium enterprises (SMEs) and non-bank finance companies (NBFC). The RBI has put as many as 11 public sector banks under the prompt corrective action (PCA) framework ever since Urjit Patel took charge as RBI Governor in September 2016. The RBI imposed tough rules for banks under the PCA framework with curbs on lending and expansion. This affected credit flow to small and medium enterprises, forcing the government to intervene and ask the RBI to relax the PCA rules.
Subhash Chandra Garg, Secretary, Department of Economic Affairs and Rajiv Kumar, Secretary, Department of Financial Services, are the government nominees on the RBI board.