Privatise state-run banks: RBI tells govt loud and clear in stormy meeting

Acharya put forth the proposal as govt nominees raised capital needs of PSBs

The Reserve Bank of India’s (RBI’s) central board saw a heated exchange between the representatives of the government and the central bank over the capital needs of public sector lenders in its last meeting, where Deputy Governor Viral Acharya suggested that privatisation of these banks be considered.   

The government nominees on the board told the RBI that it might not be able to give money to PSBs for capitalisation beyond a point as it would affect the fiscal deficit target. Acharya responded by saying that the government should consider privatising PSBs “if the fiscal deficit is a binding constraint”, at least three persons, including a member of the RBI board, told Business Standard.

The October 23 board meeting of the RBI went on for about 10 hours, one of the longest in the recent past, during which four to five key issues flagged by the government were discussed. Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar are government nominees on the RBI’s central board.

A committee under veteran banker P J Nayak, to review governance of boards of banks, had asked the government in May 2014 to reduce its stake in PSBs to below 50 per cent.

The incumbent National Democratic Alliance (NDA) government has recapitalised PSBs in two tranches so far – Rs700 billion (announced in August 2015) and Rs2.12 trillion (October 2017). Of the Rs2.12 trillion recapitalisation plan, the government has already infused over Rs1 trillion. However, rising non-performing assets (NPAs) have led to higher provisioning by PSBs, which may require additional funding to meet their regulatory capital requirements.

To ease the financial burden, the government has asked the RBI to bring the minimum capital requirement norms in line with international practices, followed in the form of the Basel norms. The move may unlock capital of Rs600-650 billion for PSBs, according to the government’s estimates, sources said. However, the RBI has not yet agreed to the government’s demand.

According to the RBI guidelines, the common equity tier-1 (CET-1) of banks must be at least 5.5 per cent of its risk-weighted assets. However, the government feels that the RBI should prescribe banks to keep CET-1 at 4.5 per cent of their assets, which was stipulated by the Basel Committee on Banking Supervision while releasing its report on the Basel-III norms in December 2010. The RBI’s capital norms are also part of the prompt corrective action (PCA) framework.

The next board meeting of the RBI is scheduled for Monday where a series of issues raised by the government is going to be discussed. 

Both the RBI and the government have exchanged notes on ‘governance in the RBI’ and further discussion will happen in the upcoming meeting, a source said. The discussion will mainly revolve around the RBI General Regulations, 1949, which deals with the manner in which the proceedings of the RBI’s board are conducted along with procedures to be followed during the meeting. 

The regulations also deal with the delegation of powers and functions of the board to deputy governors, directors or officers of the RBI.

“The proposal is to review the regulations related to the central board of the RBI,” an official said.

Sources said the RBI and the government were in regular touch over two issues – easing provisioning norms and providing other forbearances to the micro, small and medium enterprises, and reviewing the PCA framework.

“Some middle ground can be found. There is some willingness to look at these two issues from both sides. The position may become less hardened before the RBI’s next board meeting. The financial position of some banks under PCA will be reviewed following their second-quarter results,” the person cited above said. However, the RBI is unwilling to provide liquidity measures for non-banking financial companies (NBFCs) and review its surplus transfer to the government, the person added.

On its part, a senior government official said, the “middle ground” for the government would only be to align the capital adequacy norms with the Basel framework. An official said it was unlikely that a resolution would be passed through voting in the upcoming board meeting. 

Among a dozen issues, the government has suggested the RBI to set up a special refinancing window for NBFCs, housing finance companies and mutual funds and create a facility for banks to raise $30 billion. It has also asked for review of: the application of Basel III norms to banks that are not internationally active, building up a capital conservation buffer during periods of stress and the efficacy of the PCA framework in restoring banks to health.

The need for high-risk weights for credit to MSMEs, and enhancement of opportunities for rectification and restructuring of MSMEs’ loan accounts are also some demands raised by the government.