Govt. directions to RBI under Sec. 7 unlikely

To meet the government halfway, the RBI may take some steps to boost loans to the MSME sector that had been badly hit by the demonetisation exercise, and which the government is keen to support in an election year. However, it is to be seen how much RBI can do, since the central bank may have some reservations about the sector’s loan absorption capacity at this point in time.

The RBI may also climb down from its position of stringent norms for the PCA framework for banks. As many as 11 public sector banks out of 21 are under PCA, which the government thinks is hampering loan growth. RBI may ease some of the conditions, which may help some lenders come out of PCA.

The RBI and the Centre may also reach an agreement to form two committees, to address the issue of economic capital of the RBI and other governance issues.

“The issue of economic capital is a technical one and conclusion on such an issue cannot be reached in a two-hour board meeting,” said a source.

On the governance issue, it is increasingly felt that the RBI management must be made accountable to the board. The board so far has refrained from taking up specific policy-related issues and its main focus has been to provide a broader vision to the central bank. It has been argued that the central bank has slipped on many issues — such as not anticipating the IL&FS crisis and poor supervision in the case of fraud perpetrated at the Punjab National Bank — and that its management should have been made accountable to the board.

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