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Nearly a month worth of barbs exchanged through speeches and comments. A nine-hour meeting at the Mumbai headquarters of the Reserve Bank of India. Followed by a 175-word statement, which saw both the RBI and the government make an attempt to step back from the edge.
The carefully worded statement, which came late in the evening, helped put to rest the worst fears of a government raid on the central bank’s balance sheet and an exit from the top ranks of the RBI. Yet, it resolved none of the underlying issues, choosing to leave those for another day.
For now, the RBI board has pushed the regulator into making a few small concessions, decided to set up a few committees and examine some demands.
The decisions announced by the central board on Monday include:
The board meet took place amidst intense scrutiny given the very public spat that had broken out between the RBI and the government after a speech by deputy governor Viral Acharya. In his speech, Acharya had cautioned against the implications of impinging on central bank independence. It later emerged that the speech had been prompted by the government’s threat to use a rare provision of the RBI Act to direct it to take actions in public interest. It is not clear whether that provision (Section 7 of the RBI Act) came up for discussion at Monday’s board meet.
The most contentious of issues was that of the RBI’s balance sheet. On this, the two sides have decided to set up a committee to review the economic capital framework which governs the amount of capital that the central bank holds.
Some sections in the government have argued that the RBI is holding excess reserves, which should be transferred to the government. There are two material components to RBI’s reserves:
Most economists agree that a transfer from the unrealised gains in the currency and gold revaluation reserve is not possible without a sale of gold or foreign currency assets. Hence, the debate is centered around whether the central bank is holding excess contingency reserves and whether it should transfer any more funds to it in the future.
The economic capital framework is likely to review these aspects.
The government has argued it differently and is looking at the total capital on the RBI’s balance sheet, which it believes is excessive. According to one government calculation, the RBI may be sitting on Rs 3.6 lakh crore in excess capital.
In what amounts to a marginal change to the capital norms applicable to banks, the RBI board, while deciding to retain the Risk-weighted Assets Ratio (CRAR) at 9 percent, agreed to extend the transition period for implementing the last tranche of 0.625 percent under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020.
Government representatives had argued that India has prescribed capital norms that are tougher than many other countries. The government had asked the RBI to bring down capital to risk (weighted) assets ratio to 8 percent, in line with Basel III norms, from 9 percent currently. This would have helped banks save Rs 55,000 crore in capital.
However, the RBI has not given in on this.
As per the Basel implementation plan put out by RBI in 2013, banks were asked to maintain a total minimum capital of 9 percent, with a core equity tier-1 (CET-1) capital of 5.5 percent. In addition, banks were asked to build a capital conversation buffer in stages, reaching 2.5 percent by March 2019. This process will now be completed by 2020.
No immediate change has been made regarding banks under PCA but the RBI board said in its statement on Monday that the matter will be examined by its Board for Financial Supervision (BFS).
At the time the framework was implemented, the government didn’t raise objections. However, it now feels that it’s hurting the flow of credit in the economy. The health of these banks remains weak, supporting the need for continuing with the corrective action, showed a recent BloombergQuint analysis.
In the face of government and industry demands that RBI enhance credit facilities to medium and small enterprises, the central bank’s board advised the RBI to “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”.
The decision validates the stress that has been building up in the SME segment, said Saswata Guha of Fitch Ratings. “Restructuring as a tool is not unique to India. But in the past, Indian banks have used restructuring in a rather less prudent way, which forced RBI to eventually do away with (any forbearance for) restructuring,” he said.
(This article was first published on BloombergQuint)
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