RBI Board Meeting: Central bank, government signal truce after nine-hour-long talks

Amid a month-long tussle with the Centre, the Reserve Bank of India (RBI) on Monday, November 19, held a day-long meeting over several contentious issues that came to light over the last couple of weeks. The factors include the amount of capital the Reserve Bank of India (RBI) needs, lending norms for small and medium enterprises (SMEs) and rules for weak banks. The crucial RBI board meet is expected to alter the equation between the government and the central bank.

The 9-hour-long marathon meeting marked attendance of RBI Governor Urjit Patel and his deputies along with government nominee directors - Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar and independent members like S Gurumurthy. Most of the RBI's 10 independent directors, including Tata Sons Chairman N Chandrasekaran took part in the meeting to arrive at a middle ground on a dispute with the Centre.

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The meeting ended on a conciliatory note with the RBI announcing a scheme for the restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs. 250 million, subject to such conditions as are necessary for ensuring financial stability. The central bank also announced that it would inject Rs 8,000 worth of liquidity into the system through open market operations on November 22.

Reserve Bank of India (RBI) Board meet concludes at RBI Headquarters in Mumbai. pic.twitter.com/kB7XALzB7K

— ANI (@ANI) November 19, 2018

On easing "Prompt Corrective Action" the government said that the existing framework is hurting credit flow in the economy but the bank is averse to any change. "Prompt Correction Action" refers to a set of rules that come into action when ailing banks breach regulatory requirements.

The central bank has also decided to constitute an expert committee to examine the Economic Capital Framework (ECF), the membership and terms of reference of which will be jointly determined by the Government of India and the RBI.

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The RBI Board, while deciding to retain the 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 - up to March 31, 2020.

The Centre, however, has denied allegations of invoking Section 7 of the RBI Act, saying it did not ask the central bank to transfer Rs 1 lakh crore to the government. Section 7 empowers the government to consult and give instructions to the RBI governor in public interest.

It’s been a quite long time now that the government has been pressing the RBI to reduce capital ratios for banks. The step, which would speed up loans to small businesses in remote parts of the country is considered to be a crucial vote bank for Prime Minister Narendra Modi in the backdrop of ongoing Assembly elections and 2019 Lok Sabha elections due by May.

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Last week there were reports that RBI governor Urjit Patel met Prime Minister Narendra Modi in the national capital in a bid to resolve some of their policy differences. Patel’s resignation rumours were also off the table for as enough progress had been made to avoid bitterness at the central banking institution of India.