NBFC liquidity, not governance, to be focus of next RBI board meet

The government will push harder on measures for providing liquidity in the financial system rather than changing governance norms of the Reserve Bank of India (RBI). ‘Governance in RBI’ was supposed to be the main agenda to be discussed in the next meeting of the RBI’s central board, which has top finance ministry bureaucrats as government’s representatives, slated to be held on December 14.

“There was a relatively peaceful atmosphere between the RBI and the government in the last meeting. We want to continue that. The governance in the RBI is more long-term in nature. In any case, there has been headway in at least two-three issues,” a top government official said, requesting anonymity.

The government may prioritise taking up issues related to providing liquidity to the non-banking financial companies (NBFCs) and discussing the recommendations of the RBI’s board for financial supervision on the prompt corrective action (PCA) norms. “Our focus now is NBFC liquidity and boosting credit for banks,” the official added.

The official that the government’s argument – through Economic Affairs Secretary Subhash Garg and Financial Services Secretary Rajiv Kumar – will be on the liquidity stress in housing and consumer goods sector and how it is impacting further economic activity.

“Banks are lending to homebuyers who pay that money to the builders. That is how the builders are managing. The NBFCs are just saving for the future,” explained the official quoted above, adding banks will be encouraged to lend more to homebuyers as well as those looking to buy cars and luxury electronic items.

Among other measures, the government nominees on the RBI’s central board had proposed a special refinance window for NBFCs, among other measures, in a bid to boost liquidity. However, the RBI has so far maintained it doesn’t view cash crunch as a systematic issue, which it feels is limited to a few housing finance companies.

Sources said the government had moved a proposal titled ‘governance in RBI’ at least six months back as it was upset over being kept in the dark on the new norms for resolution of stressed assets set by the central bank in February, popularly known as the February 12 circular.

“The board members feel they are playing the role of a rubber stamp. Everything comes to the board for post-facto approval. So what is the point of appointing experts from various fields on the central board of RBI?” an official asked. However, this official also confirmed that while these governance issues need to be taken up, the Centre’s top priority will be regarding liquidity in NBFCs and banks.

According to sources, the government has proposed “drastic changes” in the rules framed to re-tune the composition of three committees of the RBI: Board for Financial Supervision (BFS), the Board for Payment and Settlement Systems (BPSS), and the Committee of the Central Board (CCB). In return, the RBI has also exchanged its notes with the government suggesting only minor tweaks in the norms.

All the three committees are chaired by RBI Governor Urjit Patel. The BFS, which deals with consolidated supervision of the financial sector, meets once a month normally and is going to meet on December 6 to consider the government’s demand for bringing some banks out of the PCA.

The RBI governor, all deputy governors and four directors nominated by the governor are part of the BFS. Three members are sufficient to form a quorum for the meeting, according to the regulations. The government wants more independent directors in forums, including the BFS, and may also push for increasing the quorum in case of all the CCB and the BFS, sources said. The rules – RBI General Regulations, 1949, and RBI (Board for Financial Supervision) Regulations, 1994 – are proposed to be amended to bring about the change.

The Centre has, however, not suggested a government representative on these committees, Financial Services Secretary Rajiv Kumar had told Business Standard in an interview published on Monday. He had said the government wants to ensure that there are “no closed-door discussions.”

There are other issues related to governance norms which have appeared on the RBI’s board agenda over the past few meetings but have not been taken up. These would require the RBI board to draft regulations to enable setting up panels to oversee functions, including financial stability, monetary-policy transmission, and foreign-exchange management. These are unlikely to be taken up in the next meeting as well, and may figure on the agenda only as a matter of formality.

In the previous board meeting, held on November 19, the RBI decided to set up a panel for transfer of RBI’s surplus funds to Centre, review PCA framework, frame a restructuring scheme for stressed micro, small and medium enterprises loans, and relax a component of capital adequacy norm by one year.

However, the RBI didn’t agree to a slew of requests from the government to align its regulations with the Basel framework followed globally.