Board committees to assist RBI

Board committees to assist RBI

News:

1. The government and Reserve Bank of India have found a middle ground on the contentious issues between the two in the board meeting held recently.

Important Facts:

2. The Reserve Bank and the government have agreed to refer to an expert committee the following issues:

• The appropriate size of reserves that the RBI must hold and transfer of surplus reserves.
• Relaxing norms for weak banks with the government pushing for a review to allow a few state-run banks out of the Prompt Corrective Action (PCA) .

3. About the committee: RBI has agreed for setting up of an expert committee on the economic capital framework (ECF) and its mandate is restricted to future earnings and not the existing reserves.

• The membership and terms of reference will be jointly determined by the Government of India and the RBI.

4. Key aspects during meeting:

• Forming a committee on RBI’s economic capital framework
• Debt recast scheme for micro, small and medium-sized enterprises
• Extending the deadline for last tranche of capital conservation buffer by one year
• Review of banks under prompt corrective action by the Board for Financial Supervision (BFS).

5. Decisions taken during the meeting:

• On the issue of capital adequacy ratio, after much deliberations to reduce it to 8%, it was finally retained at 9%.

• It also agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020.
• On the PCA, Board for Financial Supervision (BFS) of RBI will review the norms and decide if some of the parameters like net non-performing asset (NPA) ratio could be relaxed so that some of the banks come out of the PCA.
• There are 11 public sector banks out of 21 that are on PCA. The BFS consists of governor, four deputy governors and few other board members.

• The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to ₹250 million [₹25 crore] , subject to such conditions as are necessary for ensuring financial stability.

5. Unresolved Issues:

• The liquidity shortage faced by NBFCs: The finance ministry believes NBFCs are facing an acute liquidity crisis, which was spilling over into the real estate sector and small businesses.
• RBI announced that it would inject ₹8,000 crore liquidity through open market operations soon.

6. Significance:

• The move is in line with its global counterparts, as several board committees are being formed on various aspects like technology, risk management, banking regulation, supervision, among others, to assist the central bank in its operations.
• The move is also seen to make the RBI management accountable to the board and making the board more hands-on.
• Till now, the board has not been involved in any policy-related matters but is engaged in providing a broader vision to the regulator.

7. Background: The tension between RBI and the government was started with the latter referred to section 7 of the RBI Act for consultation on these issues. Section 7 gives the power to the government to issue direction to RBI.