While the trouble between the government and the Reserve Bank of India has been simmering for a while, RBI Deputy Governor Viral Acharya’s public outburst on Friday followed a persistent demand by some recently-appointed non-official directors to the central bank’s board for MSME (Micro, Small and Medium Enterprises) forbearance and relaxation of the RBI’s prompt corrective action (PCA) framework for some banks to ensure better credit flow to stressed sectors.
According to sources, S Gurumurthy of Swadeshi Jagran Manch, who is now a part-time, non-official director on RBI’s Central Board, has been unbending on his demand for MSME forbearance and increased credit flow, particularly at a time when growth is seemingly slowing down.
MSME forbearance would ease the criterion for banks in recognising loans to this segment as non-performing assets. Some other directors nominated by the government, including former cooperative banker Satish Marathe, former Indian Audit and Accounts Service officer Revathy Iyer and Director General, RIS, Sachin Chaturvedi, have also differed with RBI’s full-time directors on these issues.
EDITORIAL | An area of conflict
The RBI website shows that the Central Board currently has 18 members, including five full-time directors from within the central bank — Governor Urjit Patel and four deputy governors. When contacted, Gurumurthy told The Indian Express that the “issue is being discussed by the Central Board” and hence he would not comment. Gurumurthy and Marathe were appointed to the board on August 8, when Piyush Goyal was handling the finance and corporate affairs portfolios in the absence of Arun Jaitley.
In fact, RBI data on deployment of gross bank credit till August-end this year shows that credit to industry has grown by a meagre 1.9% year-on-year, and, within this broad category, credit to micro and small enterprises has increased 2.6%, and to medium enterprises by 6.5%. In contrast, credit to the services sector has posted a phenomenal 26.7% growth. The MSME segment accounts for just about 6% of the gross bank credit.
The RBI Central Board is sharply divided on the issue, with some other part-time, non-official directors backing the full-time directors from within RBI. The RBI is of the view that the demand for MSME forbearance and pulling banks out of the PCA framework is in conflict with RBI’s position to create an environment of “sustainable banking” and “staying the course” on lending restrictions till banks improve their finances.
The PCA framework specifies regulatory trigger points on three parameters: capital adequacy ratio, non-performing assets and return on assets. The PCA is applicable to 11 of the 21 listed state-owned banks which account for over Rs 3 lakh crore of the total Rs 8.4 lakh crore bad loans. These are under RBI watch and face restrictions on lending, dividends and branch expansion.
The latest meeting of the RBI’s Central Board last week was inconclusive and was adjourned. No date has been fixed for the next meeting since the availability of all members needs to be ascertained.
“Essentially, it’s a growth versus risk or credit versus sustainable banking fight,” said a member of the RBI Central Board, who did not want to be named.
Ironically, there is a view by some part-time non-official directors that demonetisation inflicted significant damage on the MSMEs, and hence they required forbearance. This is not necessarily true, since MSME performance depends on several other factors including infrastructure, human capital and productivity, a director who backed RBI’s stability stance said.
Another issue over which several part-time directors are dissatisfied with the RBI is the central bank’s response, or lack of it, to the liquidity crisis in the NBFC sector. One of the largest NBFCs said the sector’s request for an audience with RBI top officials is yet to be heard. “We have met the Niti Aayog vice chairman, but all instruments to prevent a crisis are with the RBI,” said a senior executive with an NBFC, who did not want to be identified.
Another Central Board member, who also did not want to be named, said the RBI can be high-handed at times. “Independent regulator does not mean one who doesn’t engage with stakeholders. We have come a long way with the setting up of a truly independent monetary policy committee. But the RBI must understand the nuances of central bank independence. The public institution has to be responsive to the situation. It has to at times react to the weather of the moment,” the member said, in response to unconvincing measures by the RBI to provide comfort to the NBFC segment so far.