Truce between government, RBI after seniors step in to resolve issues

The Reserve Bank of India and the government are expected to resolve at least two issues at the central bank's board meeting: prompt corrective action (PCA) and a special refinance window for non-bank

The Union government and the Reserve Bank of India (RBI) appear to have reached a truce on a number of issues ahead of the much-anticipated meeting of the central bank’s board of directors on Monday. This softening of stand by senior figures on both sides of this prolonged dispute is expected to lead to concrete resolution on at least two issues — prompt corrective action (PCA) and a special refinance window for non-banking financial companies (NBFCs).

On Friday evening, there were reports that the Centre was proposing changing rules that would enable closer supervision of the central bank. It has also recommended that the RBI board draft regulations to enable setting up of panels to oversee functions including financial stability, monetary policy transmission, and foreign exchange management. However, sources said this was a held over item from the last board meeting agenda. Officials confirmed to Business Standard that the issue would not be taken up on Monday.

Business Standard has learnt that the efforts to secure a “ceasefire” between North Block and Mint Road were led by people in the top-most levels of government. As things stand, the RBI board is likely to pass resolutions on easing some clauses of the PCA norms and addressing the liquidity issue in the NBFC sector. The government, on its part, may relent on deliberations under Section 7 of the RBI act, and agree to the issue of the economic capital framework being referred to a committee.

“There is a truce between the government and central bank. A lot of work has gone into ensuring that the board meeting on Monday takes place smoothly and that an agreement is reached on a number of issues in the interests of the financial sector and small and medium enterprises,” said an official.

The RBI’s representatives on its board include Governor Urjit Patel and the four deputy governors. The government’s representatives are Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar.

As reported earlier, the finance ministry’s priority will be two points: Get the RBI board of directors to pass a resolution on easing of PCA norms, and on a special refinance window for NBFCs, housing finance companies, and mutual funds.

All other contentious issues — including a new economic capital framework and the additional surplus arising out of it; regulation of state-owned banks and payment regulations, and others — will be dealt with later.

The government wants the RBI to align its regulatory capital norms and the PCA framework with Basel-III guidelines, an international regulatory framework for banks. There are 12 banks under PCA, 11 state-owned and one private. Being under PCA has restricted their lending activity, especially to small and medium sector enterprises.

This worries the Modi government because it looks to go into a clutch of assembly elections now and the Lok Sabha elections later in 2019, and wants the norms to be eased so that banks can kick-start lending to the MSME sector.

On the issue of NBFCs, government officials say since a lot of homebuyers and vehicle buyers have turned to NBFCs for their loan requirements because of restrictions on banks, it is imperative that there be no liquidity crisis in the sector. The government had raised concerns with the RBI on the liquidity crises among housing finance companies and smaller NBFCs. However, the RBI’s stated position so far is that there is no systemic cash crunch and hence no need for a special refinance window for NBFCs. Last month, the RBI had announced regulatory relaxations and incentives, giving banks room to lend more to NBFCs and housing finance companies in a bid to increase liquidity. The measures were in the wake of the lending freeze witnessed following the IL&FS crisis.

In October, the Centre wanted to start consultations with Patel under Section 7 on a number of issues. According to Section 7 of the RBI Act 1934, the central government may issue directions to the RBI. The directions are binding in nature, as it may “consider necessary in public interest” after consultation with the RBI governor. These requests for consultations may now be withdrawn. One of the contentious issues is of a new economic capital framework. As part of the past discussions on the framework, the government told the RBI that according to its calculations, the RBI can free up Rs 3.6 trillion. The final decision on how much to pay will lie with the central bank. The matter may be referred to a committee after the board meeting on Monday.