The RBI's board meets for the first time today since the deep rift between the Centre and the regulator came out in the open. While there are enough and more contentious issues on the agenda, ranging from MSME credit to the central bank's reserves, the meeting may reportedly also see the Centre push for more active participation by government nominees to the central board in the decision-making process.
Citing senior government officials, The Economic Times reported that there's been a deterioration of the routine consultative process between the two sides since the start of 2018. The Centre may also look for a say in key committees chaired by the RBI governor that don't have any government representation currently. "We would like to see more participation in Board for Financial Supervision (BFS) and the Committee of the Central Board (CCB)," said an official. These two committees assist the central board, along with the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).
Under the current structure, RBI's nominees on these committees can reportedly take decision on their own, without keeping key stakeholders in the loop. So, the government is expected to ask the RBI to at least seek comments, if not approval, on issues that can impact the overall economy. "Let them have our dissent notes and put it out in public domain when there is a need," the source added.
Another government official told the daily that in the past there were backchannel talks, even a formal consultative process, but things had now become unidirectional. He added that the RBI's controversial February 12 circular was an example of the process having failed. So there was "no alternative left for the government but to start discussions under Section 7".
In February, the RBI had issued a circular outlining a revised, stricter, framework for resolution of stressed assets. The new framework made it mandatory for banks to identify signs of incipient stress in loan accounts and classify stressed assets as Special Mention Account (SMA), immediately on default. Furthermore, lenders were asked to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore and above within 180 days, failing which insolvency proceedings have to be invoked against the defaulter.
The Centre recently invoked Section 7 of the RBI Act, 1934, for the first time ever, to ask the regulator to address three prime concerns: Easing NPA norms to kick-start lending, easing the liquidity crisis facing non-banking finance companies (NBFCs) and the issue of surplus funds. The Section in question empowers the government to issue directions to the central bank on matters of public interest.
The government has complained that the large number of banks under the RBI's prompt corrective action (PCA) framework - 11 out of the 21 PSBs - has impacted credit growth, thereby curtailing investment, growth and job creation.
The government has also been pushing the regulator to consider a special dispensation for micro, small and medium enterprises (MSMEs) and non-banking financial companies (NBFCs), which have been facing liquidity issues. The Centre feels that the MSME sector - which employs about 12 crore people and plays a critical role in the economy - needs some support after being impacted by demonetisation and implementation of the Goods and Services Tax (GST), but the RBI's stand has been that there is no such crisis.
With general elections coming up next year, and voters concerned about weak farm incomes and jobless growth, the government is hard-pressed to stimulate the economy and views the RBI's hawkish stance as a speed-breaker.
With agency inputs
(Edited by Sushmita Choudhury)