The tone and tenor of the statement which the Reserve Bank of India (RBI) issued after a marathon board meeting on Monday evening indicated that the government may have stepped back from its earlier belligerent stand. At least for now.
But this lull in the battle between the government and the RBI could well be temporary and more a case of shrewd politics than common sense. It is entirely possible that in the next meeting of the board, scheduled for December 14, some of the contentious issues are back on the table.
The government and the RBI have been waging a pitched battle ever since the last meeting of the RBI’s board of directors and subsequent comments by Deputy Governor Viral Acharya about the independence of the central bank at a public lecture.
The government has been reportedly insisting that the RBI part with substantial corpus of its reserves and most experts believe this will help the government plug its fiscal gaps, but may not be such a good idea from the RBI’s point of view.
Other points of friction have been a liquidity squeeze in the small and medium enterprises sector on which the government believes the RBI has been unresponsive; it also wants some of the banks on which lending restrictions were earlier imposed to be taken out of the prompt corrective action (PCA) framework.
Monday’s board meeting went on for over nine hours and was widely expected to be a stormy one, with government nominees and some other directors expected to strongly advocate the government’s line. But as former finance minister P Chidambaram pointed out in a television discussion after the board meeting ended, the government may have taken a few steps back (by not insisting on all the contentious issues) so that the impending elections in some crucial states go through smoothly; and its skirmishes with the RBI move away from the front pages of newspapers for the time being. There would be enough room later for some tough manoeuvring.
Be that as it may, the decisions taken at the board meeting are a cause for cheer, even if temporary. The RBI statement mentioned that the board discussed “the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI.”
Three major decisions were taken:
1) The board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the government and the RBI.
2) The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore, subject to such conditions as are necessary for ensuring financial stability.
3) And with regard to banks under PCA (prompt corrective action), it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI.
The most contentious of the three major issues discussed obviously was the regulatory capital framework or the reserves the central bank continues to hold. The RBI has been speaking out against the government’s reported contention that it is over-capitalised, by saying that it needs healthy reserves to counter any risks that may emerge in the economy. The government feels the RBI could be sitting on excess capital of anywhere up to Rs 3.6 lakh crore.
Now that the board of the RBI (which comprises two government nominees) has agreed to constitute an expert committee to deliberate on this contentious issue and find out what capital adequacy should be in the current scenario, any confrontation and fallout of this debate has at least been postponed.
YV Malegam, one of the longest serving former members on the board of the RBI, told CNBC-TV18 that capital adequacy of the RBI should be determined periodically and the decision to ask a panel to study the matter was a good one. A committee had examined capital adequacy last in 2013 when Malegam was also a member, saying that its recommendations held true for three years. So a review of the norms was due anyway. Besides, the board may not have the required domain knowledge to study such a technical subject and it would be best if a committee of experts were to examine whether the RBI should give more from its surplus to the government.
On getting some banks out of the PCA framework, too, the fact that the Board for Financial Supervision (BFS) has been tasked shows that the government has not unduly insisted on being a party to the decisions in this matter and that it remains with the RBI’s domain. Remember, the government has been crying hoarse about the flaws in RBI’s latest framework to deal with those public sector banks which are stressed.
The RBI implemented the PCA norms at the beginning of this fiscal and currently, 11 of the 12 banks in the new framework are PSU banks. These banks face lending restrictions and some other curbs so that they eventually become stronger. Government officials had earlier alleged that neither was the government consulted before RBI framed the revised PCA norms, nor were suggestions by government representatives in subsequent meetings on relaxing lending restrictions for such banks heeded.
And on the matter of easing liquidity for the small and medium businesses, the RBI seems to have bowed to the government’s wishes in a limited way and this again is a good move.
As another former finance minister, Yashwant Sinha, pointed out, a nine-hour board meeting of the RBI would signal that India is undergoing some financial emergency. But the case is merely a breakdown of communication between the government and the country’s central bank. Instead of escalating tensions by insisting on contentious issues, the government must ensure that the demands it makes of the RBI are within the framework of the act under which the central bank functions.
There is little to be gained by having an ‘activist’ board, whose role is restricted to advising the RBI governor under the current norms. It would be best for everyone involved if issues were decided through consensus instead of coercion.
(The author is a senior journalist. Views are personal.)
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