The current rift with the government will play at RBI's crucial board meeting Monday, with the Finance Ministry nominated and some independent directors expected to address Governor Urjit Patel and his team of issues ranging from MSME credit to central bank reserves, although both Parties are positive to reach a common ground.
Although there have been reports and requirements from a few quarters to the governor to go down, sources say that Patel will not put pressure and would also strongly defend the central bank's guidelines for strict NPA recognition standards, as well as measures taken for to facilitate the MSME credit supply.
Patel and his four deputy members, all of whom are members of the RBI Central Board, will present a united front, while a few independent directors are expected to support the central bank's mission to clean up the balance, sources said.
The central board, under the direction of the RBI governor, is expected to discuss matters mentioned on the agenda circulated to board members in advance.
Off-agenda items can also be raised in the meeting, with the permission of the chairs. The RBI Central Board currently has 1
The members include Governor Urjit Patel and his four deputy members as "full-time directors" while the remainder 13 are nominated by the government, including two ministers of finance – secretary for finance and finance secretary.
Sources said that the Government and Reserve Bank of India (RBI) seem to arrive at a comfortable solution for the relaxation of rapid response measures (PCA) and ease of lending standards for the MSME sector.
If not in this board meeting, the question of the relaxation of the PCA framework would come up with a solution over the next few weeks, they added. As a result of relaxation, some banks may come out of the PCA framework by the end of this fiscal policy.
Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders. These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. The PCA framework begins when banks break with any of the three main regulatory triggering points – namely capital ratio to risk-weighted assets, net deferred assets (NPA) and return on assets (RoA).
Globally, PCA enters into only when banks release a single capital adequacy framework, and the government advocates that this practice be adopted for the domestic banking sector as well. RBI is also expected to consider a special dispensation for micro, small and medium sized enterprises (MSMEs) and non-bank financial companies (NBFCs) who have encountered liquidity problems. The government believes that the MSME sector – which employs about 12 crore people and plays a critical role in the economy – needs some support after being influenced by demonetization and implementation of the goods and services tax (GST).
However, the central bank has been opposed to the government's demand as it considers the sectors vulnerable.
Meanwhile, Finance Minister Arun Jaitley said on Saturday that growth should not be reduced by limiting credit availability and liquidity. It is necessary that the growth process does not suffer because of the clearing of the banking system from the "collective committed sins" in 2008-14 when regulatory mechanisms also overlooked high debt accumulation, he said.
In the midst of increasing tensions with the central bank, the Ministry of Finance had searched for discussions under the never-used section 7 of the RBI Act, which allows the government to issue directions to the RBI governor.
RBI deputy Viral Acharya had in a speech last month talked about the independence of the central bank and argued that a compromise could be "potentially disastrous" for the economy. In his first public comments since the spat between the RBI and the Ministry of Finance came out, the Swadeshi ideologist, S Gurumurthy, said last week "is not a happy thing at all".
Gurumurthy, who was appointed to the RBI board a few months ago, said that the capital adequacy prescribed in India is 1 percent higher than the global Basel standards. He also proposed to facilitate lending standards for small and medium-sized businesses, accounting for 50 percent of the country's GDP. Last month, RSS-affiliated Swadeshi Jagran Manch said that the RBI governor should work in sync with the government or get rid of.
"The Reserve Bank of India Governor should work in sync with the government or otherwise withdraw," said SJM co-founder Ashwani Mahajan.