In the backdrop of recent public fallout between the Reserve Bank of India (RBI) and the Government, with a scare around a potential resignation by Governor Urjit Patel with Section 7 being invoked, the Central Bank’s Board met on Monday to discuss certain areas of contention.
In a marathon meeting lasting over 9-hours, RBI deliberated on topics ranging from its own capital policy, relaxation of the Prompt Corrective Action (PCA) framework for ailing banks, a special liquidity window for Non-Banking Financial Companies (NBFCs), to lending norms for Micro, Small and Medium Enterprises (MSME) sector.
Here are the updates from the meeting.
The Ask: Assess the level of reserves held by the RBI, handing over the additional share of 'surplus' to the government for more efficient use.
The Decision: Constitute an expert committee (whose members would be jointly decided by the Government and the RBI) to examine RBI’s Economic Capital Framework (ECF).
The Ask: Relaxation of the PCA framework for 11 public-sector banks (PSBs) wherein ailing banks face restrictions on distributing dividends, remitting profits, lending etc.
The Decision: The Board for Financial Supervision (BFS) to review the terms under PCA on December 6th. To consider easing some parameters such as relaxation of net NPA ratio requirement of below 10%. To consider bringing certain banks out of PCA if recent financial performance has improved.
The Ask: Easing of lending norms to Micro, Small and Medium Enterprises (MSME) sector.
The Decision: Consider a restructuring scheme for stressed MSME loans with notional amount up to INR25cr.
The Ask: Ease alignment of capital norms for Banks.
The Decision: Banks allowed to maintain capital adequacy requirement (CRAR) of 9%. RBI extended the transition period to allow maintenance of capital conservation buffer (CCB) of 0.625% by one year till March 2020. The extension is expected to free up $300bn of capital.
In another statement on Monday, the RBI announced that it will conduct open market operations on November 22 to inject INR8,000cr through purchase of government securities.
Moody Consensus? While constituting an expert committee to review RBI’s ECF, any decision taken will not be applied retrospectively i.e. alternate treatment/release of prior reserves is off limits.
Even as the RBI was seemingly open to considering a debt rehash for MSME borrowers, it was rather dogged on the point of relaxing liquidity for Non-Banking Financial Companies. This topic is still under discussion.
In conclusion, there appears to be a certain notion of truce.
The next board meeting to be held on December 14 will discuss items related to liquidity in non-banking financial companies (NBFCs) and ‘governance in the RBI’.
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