Welcome 'non-event'

Govt, RBI deserve credit for defusing the crisis

A day after the marathon board meeting of the Reserve Bank of India, many in the financial markets termed it a “non-event”. That in itself is a ringing endorsement of the maturity shown by the government and the central bank in defusing the crisis that followed a public spat between the two sides. Broadly speaking, while the government was concerned about a lack of liquidity and lending in the economy, the RBI management was protective about adherence to prudential norms. The disagreements led to a full-blown crisis, with talks of the government reportedly initiating proceedings under Section 7 of the RBI Act, under which it could order the RBI to carry out its decisions. While some efforts at dialling down the rhetoric were made in the past fortnight, there were murmurs of the RBI governor contemplating resignation, which would have been a severely damaging signal for the policymaking apparatus in the country. Given this background, it was a big relief that the 18-member central board of the RBI managed to steer clear of all controversies and opted for further deliberations and minor tweaking to ensure that the RBI’s institutional credibility is not damaged.

The board discussed four contentious issues: The economic capital framework (ECF) of the RBI, the prompt corrective action (PCA) framework for banks struggling with losses and non-performing assets (NPAs), the debt restructuring scheme for stressed medium, small and micro enterprises (MSMEs), and the Basel regulatory capital framework for banks. Perhaps, nothing was as contentious as the ECF because the government reportedly wanted to use a much bigger amount of the central bank’s excess reserves for its own use. The RBI had been vehemently resisting such a demand, arguing that such “notional” reserves were needed for the country’s financial stability. In the end, the board wisely chose to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the government and the RBI. Both sides showed flexibility in their approach on the PCA framework as well. On the other two issues, the RBI was more accommodative of the government’s wishes — the board “advised” the RBI management to consider a scheme for restructuring stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million; and the central bank extended the transition period for banks to comply with the capital to risk-weighted assets ratio of 9 per cent. 

 

However, the apparent consensus on agreeing to disagree did not come easy as the RBI board meeting carried on for nine gruelling hours. The focus now shifts to the next board meeting in December, crucially after the announcement of the assembly results, when some other nagging issues such as governance in the RBI will be tackled. This is not the first time that the RBI’s autonomy has come under focus, and it will surely not be the last. Successive RBI governors in the past raised questions on what they felt were encroachments — formal and informal — on the central bank’s autonomy by powerful finance ministers. Some friction between the RBI and the government is inevitable but it should not become a public display of one-upmanship; unfortunately, that is what the nation was witnessing in the run-up to Monday’s meeting. At the end of it all, however, the signals are reassuring.