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20
November 2018
 |
RBI
(The Total Investment & Insurance Solutions)
The
board of Reserve Bank of India (RBI) has decided to form an expert committee to
examine the economic capital framework (ECF) of the central bank, which will
decide the amount of reserves it can maintain, handing over the balance to the
government.
"The
Board decided to constitute an expert committee to examine the ECF, the
membership and terms of reference of which will be jointly determined by the
Government of India and the RBI," the central bank said in a release.
The
board also considered other issues related to the liquidity crunch in the
economy and relaxation, prompt corrective action (PCA) norms to clean up
balance sheet of banks burdened with bad loans will be looked into by RBI's
Board for Financial Supervision (BFS).
Eleven
of the 21 state-run banks are under the PCA framework. The non-performing
assets (NPAs), or bad loans, accumulated in the Indian banking system have
touched a staggering Rs10 lakh crore.
The
RBI had been at loggerheads with the government over three demands: transfer a
higher portion of its reserves to the Centre to keep the fiscal deficit in
control; inject more liquidity into the system to stave off a possible blowout
among housing and finance companies; and relax the norms for PCA and income
recognition of banks.
The
differences between the government and the central bank came out in the open
after RBI deputy governor Viral Acharya spoke about the consequences of messing
around with the central bank's independence while delivering the AD Shroff
Memorial lecture in Mumbai on 26th October.
Dr
Acharya had said, “Governments that do not respect central bank independence
will sooner or later incur the wrath of the financial markets, ignite economic
fire, and come to rue the day they undermined an important regulatory
institution.”
Since
then, the government has been openly critical about the RBI and was apparently
prepared to use its powers under Section 7 of the RBI Act to issue directives
to the central bank. However, during the board meeting, members have decided to
refer this to the expert committee.
According
to CARE Ratings, the issue is important, as there has been a strong case made
to transfer the surplus reserves of the RBI to the government as the present
level is higher than global standards. "These reserves would presumably be
used by the government for the welfare of the people. The argument on the other
side is that these reserves are notional and required for contingencies. The
committee will have to decide on how much of such reserves would have to be
maintained and the purposes for which they should be used. Also the effect on
forex reserves and money in circulation will have to be worked out when such a
decision is taken," it says.
These
decisions were taken following a crucial board meeting in Mumbai that lasted
over nine hours to discuss the liquidity crisis that initially triggered a tiff
between the government and the central bank last month.
"The
Reserve Bank of India's Central Board met today in Mumbai and discussed the
Basel regulatory capital framework, a restructuring scheme for stressed MSMEs
(micro small and medium enterprises), bank health under the PCA framework and
the Economic Capital Framework (ECF) of RBI," a central bank statement
said.
The
government has been wanting the RBI to transfer more money to it from its reserves.
However, the RBI feels it needs to have a stronger balance sheet to deal with
any potential crisis and external shocks.
The
meeting had been called amid growing tensions between the Centre and the RBI
after the Finance Ministry recently sought discussions under the
never-used-before Section 7 of the RBI Act, which empowers the government to
issue directions to the RBI Governor.
"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 Rs250 million (Rs25 crore), subject to such conditions as are necessary
for ensuring financial stability," it added.
This,
CARE Ratings feel will be a positive for the SME sector which is facing various
challenges. It says, "The RBI will have to work out the guidelines and
ensure that banks go about this process in a prudent manner. The restructuring
exercise for large loans in the past had led to the creation of the NPA pile
which is still to be resolved. Therefore this exercise should be undertaken
with the necessary safeguards."
Though,
the board decided to retain commercial banks' capital adequacy ratio at 9%, it
agreed to extend the period for implementing the last tranche by one year.
"The
Board, while deciding to retain the capital to risk weighted assets ratio
(CRAR) at 9%, agreed to extend the transition period for implementing the last
tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year,
that is, up to 31 March 2020," RBI said.
On
the CRAR issue, the government maintains that the capital norm for Indian banks
at 9% are much higher than that prevailing for banks overseas.
"The
approach taken to these banks will be interesting as presently the framework
does put restraints on the operations of these banks. It can be conjectured
that any relaxation will be linked to performance so that the banks are able to
come out of this framework in a seamless manner. It would also be necessary for
the government to follow up and provide capital to these banks as their net
worth is low and under pressure from higher provisioning for NPAs," the
ratings agency says.
The
RBI's central board currently has 18 members, including Governor Urjit Patel
and his four deputies as full-time official directors, while the rest have been
nominated by the government, including the secretaries from the economic
affairs and financial services department.The
Total Investment & Insurance Solutions
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