RBI may blink on PCA, not on NBFC window in today's board meeting

The Reserve Bank of India (RBI) may agree to bring some public sector banks (PSBs) out of the prompt corrective action framework (PCA), but it is not likely to accede to the government’s demand to set up a special refinance window for non-banking financial companies (NBFCs) at the board meeting of the central bank on Monday, sources said.

Some banks may be brought out of the PCA framework, an early warning tool used by the RBI, if the government agrees to the central bank’s terms related to fulfilling their capital needs, said sources privy to the discussions between the Centre and Mint Road ahead of the board meeting.

“There are indications that the RBI may bring two-three banks out of PCA based on commitments from the government to recapitalise these banks quickly,” a source, privy to the discussion between the RBI and the government, said.

The government’s pitch before the RBI is that of the 11 banks under PCA, some have shown signs of improvement and are anticipating strong recovery through the ongoing insolvency court cases.

The RBI has raised concerns on the capital needs of the PSBs and wants the government to recapitalise them soon, a central board member said.

Though the 11 PSBs under PCA have a net non-performing asset (NPA) ratio well above the 6 per cent threshold, the provision coverage ratio of some of them improved by the end of the second quarter (Q2).

All these banks collectively posted a net loss of over Rs 100 billion in Q2.


However, the government expects PSBs to collectively recover around Rs 1.8 trillion through a resolution of 12 NPA cases in insolvency courts this financial year (2018-19).

The RBI is not yet convinced about a liquidity crunch in the NBFC segment, as pointed out by the government during the deliberations, as it feels it is not a systemic issue. However, the RBI may give some breather to the micro, small and medium enterprises to ease liquidity for them.

It is learnt that some independent board members have asked the government to consider going for voting as a means of resolution. Though the government and the RBI are not in favour of voting, the government is keeping all options open for now, sources said. “Some independent board members are pushing for voting in the board meeting. But that might be a last resort because neither side wants to head in that direction ideally,” the source said.

A host of issues raised by the government will come up for discussion at the board meeting, which is expected to last long like the previous meeting held on October 23, which went on for over nine hours, sources said.

Some officials have also sounded out independent directors that the board meeting may continue on Tuesday if all issues are not resolved on Monday, the source added.


Sources said the RBI and the government might agree to set up committees to deliberate on critical issues such as reviewing the economic capital framework of the central bank and re-tuning the governance norms for the functioning of its central board.

The RBI is particularly reluctant to ease its economic capital framework, which determines the surplus transfer required to be made to the central government.

The government thinks the RBI has Rs 3.6 trillion as “excess capital” in its reserves and wants the central bank to transfer more money to it as part of the surplus. However, the RBI feels it needs to have a stronger balance sheet to deal with a possible crisis and external shocks.

The RBI is, however, willing to take a re-look at its governance norms established in the RBI General Regulations, 1949, which deal with the decision-making process of the RBI. The government wants more independent directors to be part of the committees set up by the board for guidance on key regulations, sources said.

Both the RBI and the government have exchanged notes on the agenda related to “governance in RBI”, sources said.

The RBI’s central board has 18 members at present — RBI Governor Urjit Patel and four deputy governors, four officials from its local board, seven independent directors, along with Economic Affairs Secretary Subhash Chandra Garg, and Financial Services Secretary Rajiv Kumar.


The government nominees and the deputy governors of the RBI are not entitled to vote in the meeting.

A recent public lecture delivered by RBI part-time director S Gurumurthy has brought some sense of discomfort among board members, sources said.

Speaking at an event in the national Capital on Thursday, Gurumurthy criticised the capital adequacy norms set by the RBI and called for relaxing the PCA norms.

“RBI Deputy Governor Viral Acharya gave a speech three days after the October 23 board meeting. Now, Gurumurthy has gone public four days ahead of the next meeting. This is not a healthy sign,” said an RBI board member, requesting anonymity.

To ease the financial burden, the government has petitioned the RBI to bring the minimum capital requirement norms in line with international practices, followed in the Basel norms. The move may unlock capital of Rs 600-650 billion for PSBs, according to the government’s estimates, sources said. However, the RBI has not yet agreed to the government’s demand.

The government has made up its mind it will not use a contentious provision of the RBI Act to issue directions on its suggestions to the central bank, sources said. “It will not be good for optics. So a board-level resolution is the way forward now,” the person said.

Key takeaways

What happened at RBI’s October 23 board meet

  • Centre and RBI disagreed on a range of issues, including providing liquidity to NBFCs and MSMEs, along with Centre’s demand to review economic capital framework of RBI and to ease the prompt corrective action framework

What happened after earlier meet

  • RBI Deputy Governor Viral Acharya gave a speech on October 26, advocating independence of central bank and opposing any move to touch RBI’s reserves
  • Reports came out that Centre has initiated talks with RBI seeking its views, using a contentious provision under the RBI Act

What is expected

  • RBI agreeing to bring some banks out of PCA
  • Committee to discuss economic capital framework and governance in RBI
  • Breather window to ease liquidity for MSMEs likely


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