Capital Framework, Liquidity Issues Likely To Be discussed In RBI’s Nov. 19 Board Meeting - EcoFinBiz Blog

Blue Host

Capital Framework, Liquidity Issues Likely To Be discussed In RBI’s Nov. 19 Board Meeting

The Smarter way to get your business news - Subscribe to BloombergQuint on WhatsApp

The Reserve Bank of India’s board meeting on Nov. 19 is expected to be a stormy affair against the backdrop of the ongoing tussle between the government and the central bank, sources said, adding some members are likely to raise issues concerning capital framework, management of surplus and liquidity measures for small businesses.

Tensions between the RBI and the government have recently escalated, with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act, which empowers the government to issue directions to the RBI governor.

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

Also Read: Modi Printing Rs 3.6 Lakh Crore Would Be Worse Than Demonetisation

According to sources, the board meetings are pre-decided and the agenda is also circulated much in advance. However, board members can raise off-agenda items in the meeting.

Sources said the government nominee directors and a few independent directors could raise the issue of interim dividend along with the capital framework of the RBI.

However, any change in the central bank’s economic capital framework can be carried out only after making amendments to the RBI Act, 1934.

Other issues which could be raised include alignment of capital adequacy norms with those in advanced countries and some relaxation in the prompt corrective action framework, sources said, adding more measures to enhance lending to micro, small and medium enterprises and non-banking financial companies may also be discussed.

The RBI is following conservative capital adequacy norms which are stricter than those in advanced economies, leading to banks keeping more risk capital reserve against loans.

The government is of the view that if the RBI aligns it with the global average, it would free up bank capital which can be used for increased lending to productive sectors, sources said.

Earlier this month, Reserve Bank Deputy Governor NS Vishwanathan dismissed calls for lowering capital adequacy norms for the lenders and matching them with global levels.

The capital requirements are high for domestic lenders because of higher defaults or bad loans, Vishwanathan explained and warned that lowering capital norms merely for aligning them with global standards will create “make believe” strong banks.

With regard to the capital framework, the government last Friday said it was discussing an “appropriate” size of capital reserves that the central bank must maintain as it denied seeking a massive capital transfer from the RBI.

The RBI has a massive Rs 9.59 lakh crore in reserves and the government reportedly wants the central bank to part with a third of that amount.

Economic Affairs Secretary Subhash Chandra Garg had said the government wasn’t in any dire needs of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 lakh crore.

Also Read: RBI-Government Spat: Finance Ministry Seeks Review Of Central Bank Balance Sheet

The government, he said, is on track to meet the fiscal deficit target of 3.3 percent of GDP for the financial year 2018-19.

“There is no proposal to ask RBI to transfer (Rs) 3.6 or (Rs) 1 lakh crore, as speculated,” he had tweeted. “Government’s FD (fiscal deficit) in FY 2013-14 was 5.1 percent. From 2014-15 onwards, government has succeeded in bringing it down substantially. We will end the 2018-19 with FD of 3.3 percent. Government has actually foregone (Rs) 70,000 crore of budgeted market borrowing this year.”

Garg said the only proposal “under discussion is to fix an appropriate economic capital framework of the RBI”.

Also Read: RBI-Government Spat: Easier Banking Regulation, In Public (Or Government) Interest? 

According to experts, the “economic capital framework” includes transfer of surplus reserves to the exchequer.

Former Chief Economic Adviser Arvind Subramanian had in the Economic Survey 2016-17 said the RBI was exceptionally highly capitalised and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency.

However, this proposal never saw the light of the day.

Meanwhile, Former Union Finance Minister P Chidambaram on Sunday asked the central government what was its “tearing hurry” to “fix” the capital framework of the RBI when the ruling dispensation had just four months to complete its term.

“The NDA government has completed four years and six months of its term. It has effectively four months left. What is the tearing hurry to ‘fix’ the capital framework of RBI?” he tweeted.

Also Read: Government Vs RBI: Modi Government Trying To Capture RBI, Says Chidambaram

. Read more on Business News by BloombergQuint.

No comments


Theme images by merrymoonmary. Powered by Blogger.