Ahead of the much talked about board meeting of the central bank, RBI board member S. Gurumurthy Thursday said the stand-off between the government and the Reserve Bank was not a happy situation.
The comment comes amid the ongoing rift between the Finance Ministry and the RBI over several issues, including capital framework of the central bank and easing of lending norms for the NBFC sector.
Delivering a lecture on ‘State of the Economy: India and the World,’ at the Vivekananda International Foundation (VIF) here, Mr. Gurumurthy also said the imposition of tight provisioning norms for bad loans in one go created problems for the banking system. The stand-off between the government and the RBI is not a happy thing at all, he said.
Mr. Gurumurthy further said India should not go beyond what has been prescribed in the Basel capital adequacy norms and made a case for enhancing credit for the MSME sector.
Tensions between the RBI and the government have escalated recently with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI Governor.
The RBI’s board is meeting on November 19.
Mr. 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 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.