‘Divided’ board signals strained RBI-Centre ties

The Reserve Bank of India’s October 23 board meeting was a stormy affair that lasted about eight hours in which 20 items were on the agenda for discussion. However, only three were discussed, albeit without arriving at a decision.

One of the issues discussed was the prompt corrective action (PCA) framework of RBI — which is essentially certain restrictions that the banking regulator has imposed on banks due to worsening capital, asset quality and profitability. If a bank breaches a particular threshold on any of these parameters, restrictions are imposed.

Capital norms

According to sources, some board members were in favour of diluting the risk threshold relating to capital. They argued that capital norms for Indian banks were a lot stringent than what the Basel norms prescribed, such as 9% capital adequacy ratio as compared with the 8% requirement of Basel norms. However, RBI officials argue that the non-performing asset provision norms for Indian banks are less stringent than what Basel proposes. Presently, there are 12 banks, 11 in the public sector and one in the private sector, that are under the PCA framework.

At present, the RBI board has 18 members including Financial Services Secretary Rajiv Kumar and Economic Affairs Secretary S.C. Garg. The four deputy governors are also on the board.

The other issue was pertaining to the norms for stressed asset classification as mandated by the RBI in its February 12, 2018 circular. In that circular, RBI had scrapped all existing restructuring norms and asked banks to start resolution process if loan repayment was overdue even for a day. Some of the board members opposed the circular.

Also, there was the contentious issue of RBI’s surplus transfer. While the government wants more funds transfer from RBI by dipping into contingency reserves, the central bank has not been agreeing to this proposal.

RBI deputy governor Viral Acharya had highlighted the differences between the RBI and the government, arguing that the latter was impinging on the autonomy of the central bank. “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans,” Mr. Acharya had said.

A day after Mr. Acharya’s comment, Finance Minister Arun Jaitley, without naming any institution, said the country was higher than any institution and it was the elected who were accountable.

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Printable version | Jun 23, 2021 3:52:30 AM |

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