Govt-RBI call truce after a marathon board meeting

Govt-RBI call truce after a marathon board meeting

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. Decisions taken during 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. 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.