Industry heads to seek relaxation of rules at meet with RBI Governorhttps://indianexpress.com/article/business/industry-heads-to-seek-relaxation-of-rules-at-meet-with-rbi-governor-5522556/

Industry heads to seek relaxation of rules at meet with RBI Governor

Main demands include relaxation in February 12, 2018 circular on defaults, PCA framework and more credit flow to non-banks and small units.

Reserve Bank Governor Shaktikanta Das
Reserve Bank Governor Shaktikanta Das

Bankers, small and big businesses and non-banking finance companies (NBFCs) which are lining up to meet new Reserve Bank Governor Shaktikanta Das are pushing for relaxation of a host of stringent rules slapped on them when Urjit Patel was Governor.

In the wake of the liquidity constraints faced by the NBFCs and the credit availability to the industry, Das has called for a meeting with industry associations, micro finance institutions (MFIs), non-banking finance companies, chambers of commerce among others to take feedback on the issues the industry and lending firms are facing. He has already met the CEOs of public and private sector banks, soon after taking charge as the Governor last month. The main demands include relaxation in February 12, 2018 circular on defaults, prompt corrective action (PCA) framework and more credit flow to non-banks and small units.

Sources in the know of development said that while the former Governor did not meet the NBFC representatives both before and after the IL&FS crisis surfaced, it is a big positive that Das has called for a meeting to understand the issues being faced by both lenders and borrowers. Banks have already turned cautious while lending to NBFCs and housing finance companies.

While the chambers of commerce have been called for a meeting on January 7, the Governor is learnt to have called the meeting with MFIs, Finance Industry Development Council that has NBFCs as members on January 9. Bankers will meet Das again a week later to take up a host of issues, including the February 12, 2018 circular on one-day default norms and scrapping of loan restructuring schemes.

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Last year, on December 26, Prime Minister Narendra Modi met representatives of diversified financial services including SREI Infra, Indiabulls Group, Wadhawan Global Capital, Aditya Birla Capital among others.

A source aware of the meeting said that while the PM was aware of the constraints faced by the industry, he wanted to further assess the situation. “He asked that if liquidity was infused in the system, how long will it take for things to normalise in the lending business.

Among other issues, the PM also checked if there are some specific geographical areas that are facing the more pressure,” said a source, adding that it was a fruitful meeting.

In the first round of meeting with CEOs of public sector banks, there was plea for relaxation in the one-day default norms announced by RBI through the now-famous February 12 circular, which also scrapped all existing debt resolution mechanisms. Bankers also sought relaxation on 11 banks which are under the stringent prompt corrective action (PCA) framework.

The RBI board, at its meeting on November 19, decided to refer the issue of relaxing PCA framework to the Board of Financial Supervision (BFS) of the RBI.

What has emboldened the bankers is the RBI decision to announce one-time restructuring scheme for stressed loan accounts of micro, small and medium enterprises (MSMEs) without classifying them as non-performing assets (NPAs) on January 1, 2019. “The RBI under Urjit Patel was against allowing any forbearance in loan defaults. This is a reversal of that position,” said a source.

Bankers expect at least four banks to come out of PCA in the coming weeks. The RBI has already indicated that banks under the PCA framework have shown improvement in many areas, including cost of deposits and loan recoveries.

The have showed improvement in the share of CASA (current and savings) deposits with a reduction in the share of bulk deposits working towards reduction in the cost of deposits. They have also increased recoveries from NPAs, while containing the growth in advances and deposits, reducing riskiness of assets and focusing on better rated assets as reflected in reduction in RWAs (risk weighted assets). They have also shown lower growth in gross NPAs, relative to non-PCA public sector banks, the RBI said in the Report on Trends and Progress in Banking earlier this week.

The RBI was against relaxing the capital requirements of banks. On November 3, 2018, addressing the XLRI-Jamshedpur, RBI Deputy Governor NS Vishwanathan explained that the capital requirements are high for domestic lenders because of higher defaults/bad loans and warned that lowering capital merely for aligning with global standards will create “make-believe” strong banks.

“We must guard against any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality,” he argued.

Ruling out any special dispensation for NBFCs, the RBI had said several measures taken over the last two months have eased liquidity for NBFCs and there is no necessity for the RBI to extend help to the sector as a “lender of last resort”.

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After the December 6 monetary policy meeting, RBI Deputy Governor Viral Acharya said, “the RBI also stands ready to be the lender of last resort but that is provided conditions warrant that sort of an extreme measure. In our assessment, there is no such necessity at the present.”