RBI vs Govt: Crucial RBI board meeting today to set the tone on sensitive issues

Financial markets, banks and corporate houses are eagerly waiting for Monday’s crucial Reserve Bank of India board meeting. It is likely to set the tone on sensitive issues like easier loan sanctions to micro, small & medium enterprises (MSME), relaxation of prompt corrective action (PCA) on weaker banks, and fund transfer to the government. The central bank and the government have been warring over these issues for nearly a month.

RBI, which had taken a stern stance, is likely to relax the PCA norms only on those banks that are showing signs of a turnaround through faster resolution of non-performing assets (NPAs) and shedding of non-core assets. The other option being weighed is a committee being jointly set up by the government and the RBI to access the merits of the corrective action undertaken by the ailing banks. Last year, 11 public sector banks were brought under the RBI’s revised PCA framework which set tougher norms and banned them from lending.

Even on the issue of capital transfer to the government, the apex bank may be ready to discuss with an ‘open’ mindset. RBI is considering  allowing  the government to utilise a part of its reserves, a source said.

RBI’s total reserves stand at Rs 9.59 lakh crore. The bank’s contingency reserve is at 7.1 percent of the book. “This is well above the BRICS (Brazil, Russia, India, China and South Africa) average of 2 per cent.

Overall, reserves at 27 per cent of the book are far higher than the 18 per cent recommended by the 2004 Usha Thorat committee,” said Bank of America in a report. There is no legal bar as long as Delhi maintains Rs 5 crore of reserve fund under section 46 with the RBI in our view, the report added. Another Section 47 requires RBI to transfer its annual surplus to the government after provisions, but does not place any restriction on further transfers.

On November 9, the government said it was discussing an “appropriate” size of capital reserves that the central bank must maintain but denied seeking a massive capital transfer from the RBI.

“There is no proposal to ask RBI to transfer Rs 3.6 lakh crore or Rs 1 lakh crore, as speculated,” Economic Affairs Secretary Subhash Chandra Garg had tweeted. “Government’s FD (fiscal deficit) in FY 2013-14 was 5.1%. From 2014-15 onwards, the government has succeeded in bringing it down substantially. We will end the FY 2018-19 with FD of 3.3%. The government has actually foregone Rs 70,000 crore of budgeted market borrowings this year.” Garg said the only proposal “under discussion is to fix appropriate economic capital framework of RBI”.

However, if the board meeting turns turbulent and there is no accommodative approach, there is speculation that RBI governor Urjit Patel could resign. The expectation, though, is that both sides will arrive at a common agenda to go forward.

The RBI Act allows for cash transfers to the government kitty. If you strictly go as per the regulations section 7(2) and section 7(1) of the RBI Act, it gives the board full powers to do all the acts and things subject to government regulations. Section (3) also empowers the governor and deputy governors with similar powers, subject to the RBI board regulations.

The government is keen to push for faster credit to stressed sectors that would ensure higher economic growth rate. On November 17, finance minister Arun Jaitley said that growth must not be throttled by limiting credit and liquidity supply. 

On the other hand, the RBI's stance has been more conservative on the NPA management by the banks. RBI also feels that capital transfers should be modulated as contingency reserves are necessary for the central bank.

RBI board will meet on Monday to wind up the inconclusive discussions that first began on October 23. The two-day board meeting which could not be concluded before Diwali, is meeting again to reach a consensus on issues like payment of dividend to the government and PCA imposition on 11 public sector banks that prevents them from sanctioning and disbursing loans.

ISSUES IN SPOTLIGHT

-Easier loan sanctions to MSME, relaxation of prompt corrective action on weaker banks, fund transfer to govt
-Rs 9.59L cr RBI’s total reserves. Its contingency fund is at 7.1 per cent of the book

This story first appeared in DNA Money: Crucial RBI board meet today to iron out differences with govt