Indian banks could be recapitalised with government bonds, said an independent director on the central bank's board on Thursday, at a time when the Reserve Bank of India and the government are at loggerheads on regulatory issues.
S. Gurumurthy has been a vocal member on the RBI board asking for easier lending and capital restrictions for Indian banks and more cash for small businesses, a view that is supported by top finance ministry officials and has deepened an ongoing rift between the government and the central bank.
One way for the government to increase capital adequacy in state-run banks under Basel 3 regulations is to increase equity capital on one hand and sell sovereign bonds to the lenders on the other hand.
The move won't need actual cash infusion but only an accounting entry in banks, a process which has been used before as well by the government to increase capital adequacy ratios in banks.
For weeks, government officials in New Delhi have been pressuring the Mumbai-based RBI to accede to a range of demands, prompting RBI Deputy Governor Viral Acharya to warn late last month that undermining a central bank's independence could be "catastrophic," bringing the feud into the open.
However, the government and the RBI are now getting close to ironing out some of their policy differences ahead of a board meeting on Monday.
Gurumurthy, who has close links with the Rashtriya Swayamsevak Sangh (RSS), a right-wing organisation that supports Prime Minister Narendra Modi's Bharatiya Janata Party, called for heavy import curbs on items to contain the country's current account deficit, while speaking at an event in New Delhi.