Roll out agreed steps, the government can insist on the RBI Board meeting today

NEW DELHI / MUMBAI: The long-awaited meeting of the Reserve Bank of India Board today is likely that the government insists that the governor immediately announces the implementation of decisions taken at the last meeting to prevent further confrontation being intensified.

Finance Minister Arun Jaitley criticizes RBI for accidental lending by banks

As reported by TOI on November 2, RBI refrained from taking decisions taken on October 23 at the board meeting even if they had agreed tender. At Monday's meeting, sources suggest that the two government representatives on the board want RBI to announce the agreement to facilitate the credit flow to micro, small and medium sized enterprises (MSME), a revised fast-paced corrective action (PCA) framework for weak banks and adjustment of equity standards for indian lenders in line with international standards instead of making them stricter. The government sees these as crucial steps to secure more lending.

  RBI Graph

The government wants simpler standards for banks, in line with global rules

"The government wants the meeting to start from ending last month," told a senior government official TOI. The Center also plans to use the Platform to seek to ease the liquidity pressure on non-bank finance companies (NBFCs), which have encountered issues of collection issues since IL & FS began to default on debt payments.

The important meeting in the background threatens to invoke RBI law unused section 7, so that the Center can issue directions, is closely monitored after the gap between the RBI and the Ministry of Finance has spilled into the open last month ( first reported by TOI). Just before, in a speech, RBI deputy Viral Acharya had quoted Argentina's example and suggested that undermining of a central bank's independence could be "disastrous". Many, including RBI sympathizers, believe that Acharya's statement was unreasonably aggressive.


The statement came after an insignificant long board meeting, where the government's demands to cope with several of its concerns were not addressed. As

reported by TOI 31[ads1] October
the government had also sought consultations with RBI on three issues, which were considered as a precursor to invoke Section 7. This is regarded as the true point of view given that the Ministry of Finance and RBI were not on Same page on several issues for over a year.

For the central bank, the government's ultimate weapon, Section 7, has emerged as a red line. People with knowledge of RBI's thinking said that the allocation of the section would worsen the distance between the central bank and the government and deepen the crisis if Monday's board meeting was held under the cloud in section 7.


However, the government's aggression can be tempered by the fear that the governor and two of his deputies can choose to leave if they are pushed too hard and create an international perception.

RBI representatives are expected to impress their 18-member board that stress in some sectors is not liquidity but has more to do with a self-crisis among lenders and small businesses' absorption capacity. The central bank is likely to balance its liquidity argument by emphasizing that major redemptions of short-term NBFC debt have occurred in November without major default.

However, the government is unimpressed with the steps taken by the regulator so far and believes that the burden on financial companies diminishes its business and affects the credit flow to key sectors such as construction and small businesses.

Sources suggested that the RBI issues related best to issues related to credit flows to MSME and issues related to the NBFC. On the question of high reserves, they suggested that a large portion of corpus is ideal. It's a problem that has been debated since 1986, when secretary S Venkitaramanan was involved in a bitter battle with RBI governor RN Malhotra to apply for a higher proportion of profits.

The government has not heard of its wish that the central bank should be ruled – and has come in for some criticism. According to a former central bank, unlike the US federal government, the RBI board contains people from different walks. They have included CEOs of highly indebted companies, which should not be allowed to decide on regulation.

Although the Center can not really use the feared Section 7, it wants the board to play a more dominant role as it believes that the central bank brass does not respond to the needs of the economy and is not willing to engage in discussions with stakeholders or self older governments.

If the Center decides to issue directions to the central bank, there is no room for any professional discussion, and the RBI must implement New Delhi's wishes without entering the decision-making networks or evaluating the impact.

A veteran central bank said that the previously unused part should not be invoked by the government. "It has not been used during war, famine or any economic crisis." There is no reason for using it now, he said. "Many see this as a collision of personalities." Sources said that issues like a new capital adequacy framework can not be settled in a two-hour meeting, but must be overweight by a panel of experts who can go into previous wisdom about the subject and recommend changes.

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