The government totted up gains in terms of having a say in defining what should be the appropriate level of reserves – in short, the money that RBI can retain from its operations – as well as an understanding that could result in banks potentially lending an additional Rs 4 lakh crore ahead of the 2019 general elections. While the government will not be able to tap into RBI’s existing kitty, it may be able to extract a larger share of the surplus in future, if a panel, to be appointed jointly by the RBI and government, recommends.
RBI’s concessions came against the looming threat of the Centre invoking a never-used rule to issue directions to the central bank to act on its key concerns. The announcement came in a rare but detailed press statement issued after the board meeting, its forthrightness appeasing the government, which was annoyed by what it viewed as the RBI’s defiance even on issues the two sides had agreed on at the earlier October 23 meeting.
The mood inside and outside, Monday’s meeting of the RBI board was held in what some directors claimed to be a “congenial and conciliatory” atmosphere. “Everybody agreed that it was time to get off the front pages,” said a director, requesting anonymity. But a vast majority of independent directors, with possibly a solitary exception, as well as the two government nominees, economic affairs secretary S C Garg and financial services secretary Rajiv Kumar, minced few words as they pressed RBI to relent on issues such as improving credit flow to small businesses and boosting liquidity in general.
At the other end, RBI deputy governor Viral Acharya strongly defended RBI’s stance. The marathon deliberations, however, fetched an outcome that the government can rejoice over and RBI live with. “The decisions at the board meeting help retain RBI’s autonomy, while ensuring that the government’s proposals are carried through,” one of the participants told TOI.
As anticipated by TOI in its edition on Monday, the board meeting began from where it ended last time with a package for MSMEs on the agenda. Initially, Acharya, who had lit a fire by going public against the government’s demands, triggering an unprecedented stand-off, was resistant to offering concessions for small businesses. But with almost all the independent directors backing the government’s demand for more credit flow and higher liquidity, the RBI brass agreed to make concessions. Soon, there was an agreement on a loan restructuring scheme, details of which will be announced shortly.
The RBI statement alluded to the resistance it faced by conceding that the decision regarding relief for MSME was taken on the “advice” of the board. “The board also advised that the RBI should consider a scheme for restructuring of stressed assets of MSME borrowers with aggregate credit facilities of up to Rs 25 crore,” it said, a formulation which was interpreted by independent observers as meant to camouflage its acquiescence into a stance it may not have been comfortable with.
The board-driven decision-making process will come as a shot in the arm for the government, which was critical of a “club in RBI” (comprising the governor and his deputies) taking all crucial decisions and turning the board into a “rubber stamp”.
The statement also said that “the RBI board agreed to relax” the rule mandating banks to build a capital conservation buffer, a protection against choppy times, while agreeing to maintain the overall capital adequacy ratio (or the amount of capital that banks need in line with lending). The board decision is expected to help banks lend up to Rs 4 lakh crore over the next year and is seen as a step that will provide a lifeline for businesses against the backdrop of global uncertainty.
The decision attracted a sharp reaction with former finance minister P Chidambaram accusing the board of overstepping its limit and expressing his disappointment with the governor. It was “unfortunate that the governor gave in”, he said.
With regard to another bone of contention, the prompt corrective action (PCA) framework, it was decided that the banks concerned would be examined by RBI’s Board for Financial Supervision.