RBI, govt crucial meet today; to discuss rules on capital norms, surplus transfer and liquidity for NBFCs
It remains to be seen if the encounter today will lead to sparks of a new-found bonhomie between the government and RBI
November 19, 2018 / 13:57 IST
Clash of the titans is what can be best described for the most awaited Reserve Bank of India (RBI) board meeting on November 19.
The government and central bank nominees are meeting face-to-face to discuss disagreements and diffuse the ongoing rift to arrive at a decision on the former's demands.
The 18-member board meet will be chaired by RBI Governor Urjit Patel to debate several issues including lending rules of the prompt corrective action (PCA) framework, liquidity window for non-banking financial companies (NBFCs), capital norms and transfer of excess reserves and surplus from the central bank's balance sheet to the government.
What to expect at the meeting?
1. The RBI is likely to agree to the government's demands to tweak its PCA framework to ease pressure on weak public sector banks. At present, one private sector bank and 11 public sector banks operate under the PCA framework.
2. The board may discuss the government's publicly disclosed proposal to set-up a committee to discuss economic capital framework and governance at RBI.
The banking regulator is likely to stick to its stand on keeping reasonable amount of reserves with itself but may be open to arriving at a formulae to decide the same. As on June-end, RBI's total currency and gold reserves stood at Rs 6.9 lakh crore, up from Rs 1.6 lakh crore last year.
3. RBI is also likely to be forced on allowing a breathing window to ease liquidity for NBFCs to release funds for lending to micro, small and medium-sized enterprises (MSMEs).
This was triggered after debt-strapped infrastructure financial conglomerate IL&FS defaulted on its debt obligations in early September. This led to a ripple effect with other NBFCs raising concerns of potential defaults by firms borrowing short term and lending long term as repayments draw close.
Government versus RBI
Since October-end, the tussle between North Block and Mint Road has grabbed headlines suggesting all is not well between the government and RBI. While RBI has imposed strict frameworks on weaker banks and called for tighter monitoring of NBFCs, the government has maintained that RBI must align its rules with international standards and not make it more stringent.
The most-sacred Section 7 of the RBI Act, which gives the government power to issue directions that are binding on the central bank, was also talked about. If this section is used, experts said it would be a first in RBI's 83-year old history.
It remains to be seen if the encounter on November 19 will lead to sparks of a new-found bonhomie between the government and RBI.
