RBI vs Centre row: Big relief likely for this crisis hit sector

Reserve Bank of India (RBI) and the central government are expected to reach a consensus on easing credit availability to micro, small and medium enterprises (MSMEs). “The government is likely to seek relief on two important issues of credit and liquidity at the RBI Board meeting on November 19,” said a senior government official, adding that there is likely to be some resolution on liquidity and credit related issues.

MSMEs, which are the largest employer after agriculture, have been facing credit crunch from both non-banking finance companies as well as banks. As many as 11 out of 21 banks have been placed under the Prompt Corrective Action (PCA) of the central bank.

The PCA framework kicks in when banks breach any of the three key regulatory trigger points - capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).

“After banks tightened lending, people turned to NBFCs, the second institution which will provide credit necessary for growth. Now we hear that NBFCs are facing a liquidity problem,” said a government source.

So the immediate focus is going to be liquidity and credit, both necessary for economic growth. 

“The real issue is not autonomy or interest rates or economic capital framework. This can go on and on and can be discussed. The real issues are two-liquidity and credit,” the source said.

The government and central bank are likely to reach a resolution regarding relaxation of the PCA and easing of lending norms for the MSME sector, sources said, adding that if not in this meeting, the issues can be decided in two-three meetings.

RBI is also likely to agree to easing of lending norms for the MSME sector, including strict rating criteria to improve credit flow to this sector, sources said. However, the central bank has been averse to government demand for special dispensations for MSME and NBFC sectors as it considers them vulnerable.

Meanwhile, the RBI Board meeting is also likely to discuss Basel III norms as it can allow around Rs 6 lakh crore of additional lending. The government is likely to press for alignment of capital regulatory norms with the Basel III norms. It is of the view that RBI guidelines are stricter than the international best practices.

The government will cite the latest report of the Basel Committee on Banking Supervision (BCBS), which said that several aspects of the Indian framework are more conservative than the Basel framework.

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The banks under the Prompt Corrective Action framework 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.

This story first appeared in DNA Money: Govt, RBI may agree on MSME credit flow