After the explosive speech by Reserve Bank of India's (RBI) Deputy Governor Viral Acharya, warning the government of 'potentially catastrophic results' if they undermine the central bank's independence, there seems to be an effort to douse the fire for the time being. The government didn't waste time in issuing a statement that it respects the independence and autonomy of the RBI. A few days later, the government also denied asking the RBI to part with its surplus capital, but said it is in discussion to fix the appropriate capital framework for the banking regulator.
In fact, RBI Governor Urjit Patel also met Prime Minister Narendra Modi last Friday. Two days ahead of the crucial RBI board meet, Finance Minister Arun Jaitley kept the pressure on the central bank by saying that it should ensure that credit and liquidity supply is not throttled.
Clearly, the battle lines between the RBI and the government are drawn. The pressure is on the RBI to soften its so called rigid stance to find a way out. The duo will have to find a middle ground that respects RBI's wisdom and independence and also accommodates government's concerns on credit flow to MSMEs and agricultural sector. So take a look what is in store for the market in tomorrow's RBI board meet.
Setting up a committee to work out appropriate capital levels for RBI
The estimated level of funds available to RBI are in excess of Rs 9 lakh crore. But these funds are for meeting specific provisions, like depreciation in securities, gold and investments, etc. Not all funds can be earmarked as surplus. In fact, it is RBI's contingency funds of over Rs 2 lakh crore that the government is eyeing. The RBI would certainly need a wider debate amongst the experts before giving back any funds to government.
RBI to dilute its discretionary powers on PCA
There are close to a dozen public sector banks that are under Prompt Corrective Action (PCA), which means they cannot lend money to the industry. There is no doubt that the government has to commit more capital to make these banks healthy, but RBI can also lift some of the discretionary restrictions, like those on credit and operations. The RBI can easily allow banks with improved performance to start lending to good MSMEs.
Stricter capital adequacy norms
In the post-2008 global financial meltdown, the RBI was praised for its conservative policies as none of the Indian banks faced solvency issues. Globally, hundreds of banks went belly up. The current RBI structure of capital adequacy is slightly stringent than Basel III, but that can be relaxed if government insists. There will be implications, though, if the economic environment deteriorates in future.
Special window for NBFCs
In the last 4-5 years, the NBFC sector expanded its assets in a big way. Many borrowed funds with shorter maturity to fund long term assets. The idea was to capture as many businessees with utter disregard to asset liability mismatches. These NBFCs are now demanding a special liquidity window to tide over their mismatches. Ideally, the NBFCs should sell their assets to banks or other strong entities to generate liquidity. If this option is fully exercised, only then there is a need to open a special RBI window.
More relaxation for MSMEs
MSMEs are already a pampered lot. In the last few years, the government has relaxed many of its guidelines to support MSMEs. There may be a case for allowing some relief by way of extension of NPA classification norms, but only to very small micro enterprises.