Saturday , January 16 2021

RBI board meeting on Monday; may reach a general level on some key issues

NEW DELHI: The ongoing gap with the government intends to play at an important meeting of the RBI board on Monday, when Ministry of Finance candidates and some independent directors expect Governor Urge Patel and his team to resolve issues ranging from an MSME loan to central bank reserves, although both sides are in favor of achieving a common position.

Despite the fact that the governor has some messages and demands that the governor resign, sources said that Patel is unlikely to give way under pressure and will rather decide to defend himself against the policies of the central bank regarding strict norms for recognizing NAPs, and to take measures to facilitate loans to MSM.

Patel and his four deputies, all of whom are members of the central RBI council of 18 people, will represent a united front, while some independent directors also expect support from the central bank’s mission to clean up bank balance sheets, sources said.

The central council, headed by the governor of RBI, is expected to discuss the issues mentioned on the agenda, which will be distributed to board members in advance.

At the meeting, items may also be raised out of agenda, with the permission of the chairman.

The RBI Central Council currently has 18 members, although the position is that it can increase to 21.

The members include Governor Urjit Patel and his four deputies as “full-time official directors”, and the remaining 13 were appointed by the government, including two officials from the Ministry of Finance — the secretary for economic affairs and the secretary for financial services.

Sources reported that the government and the Reserve Bank of India (RBI) are seeking to reach an acceptable solution for easing the scope of operational correction (PCA) and easing lending standards for the MSME sector.

If not at this board meeting, the issue of weakening the PSA structure will reach a resolution in the next few weeks, they added.

As a result of relaxation, some banks may exit the PCA structure by the end of this fiscal period.

Of the 21 state-owned banks, 11 are in the framework of the ATP, which imposes credit and other restrictions on weak lenders.

These are Allahabad Bank, United Bank of India, Corporate Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Eastern Bank of Commerce, Dena Bank and Bank of Maharashtra.

The PCA structure begins when banks violate any of the three key control trigger points, namely, the ratio of capital to risk of weighted assets, net non-performing assets (NPA) and return on assets (RoA).

On a global scale, the PCA only works if banks abandon one parameter of the capital adequacy ratio, and the government is in favor of this practice, which is also accepted for the domestic banking sector.

It is expected that the IRB will consider the issue of special allocation for micro, small and medium enterprises (MSME) and non-bank financial companies (NBFIs) that face liquidity problems.

The government believes that the MSME sector, which employs about 12 crore people and plays an important role in the economy, needs some support after the impact of demonization and the introduction of the goods and services tax (GST).

However, the central bank does not show the will of the government because it considers sectors vulnerable.

Meanwhile, Finance Minister Arun Jaitley said on Saturday that growth should not be limited to limiting credit availability and liquidity.

It is imperative that the growth process does not suffer due to the clearing of the banking system of “collectively committed sins” during 2008–14, when regulatory mechanisms also did not take into account the accumulation of large debt, he said.

In the face of growing tensions in the central bank, the Ministry of Finance sought discussion within section 7 of the RBI Act, which had not been previously used, and which gives the government the right to issue instructions to the RBI governor.

RBI Deputy Governor Viral Acharya in his speech last month spoke about the independence of the central bank, arguing that any compromise could be “potentially catastrophic” for the economy.

In her first public comments, as the arrogance between RBI and the Ministry of Finance came out in the open, the ideologist Swadishi S Gurumurthy said last week that the confrontation was “not at all pleasing."

Gurumurthy, who was appointed to the RBI board a few months ago, said that the capital adequacy ratio set in India is 1 percent higher than the global norms of Basel. He also set the goal of easing lending rates for small and medium enterprises, which account for 50 percent of the country's GDP.

Last month, RSS-related Swaveeshi Jagran Munch said that the RBI governor should work synchronously with the government or resign.

“The Reserve Bank of India must work in sync with the government or otherwise resign,” said SJM co-organizer, Eswani Mahajan.

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