RBI meeting highlights: Panel to look at ECF; RBI to consider easing PCA

The Reserve Bank of India (RBI) board on Monday decided to set up a high-powered committee to examine issues related to surplus capital of Rs 9.69 trillion with the central bank and advised it to consider a scheme for restructuring stressed assets in the MSME sector.

At a nine-hour-long meeting of the board, it was also decided that the Board for Financial Supervision (BFS) of the RBI would examine the issues concerning the banks that are under the Prompt Corrective Action framework, according to a release.

"The Board decided to constitute an expert committee to examine the Economic Capital Framework, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI," the central bank said.

Further, the apex bank has been advised to consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million, subject to such conditions as are necessary for ensuring financial stability, it added.     


The board, while deciding to retain the CRAR at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. 
With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI.
The board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to 250 million, subject to such conditions as are necessary for ensuring financial stability.
On RBI capital framework
The board decided to constitute an expert committee to examine the Economic Capital Framework (ECF)
The membership and terms of reference of which will be jointly determined by the Government of India and the RBI  
RBI issues its official release on what transpired during the board meeting. 
The Finance Ministry and the RBI, together, will decide on the composition of the committee to look into the RBI capital reserves framework, reports CNBC-TV18's Shereen Bhan.

Existing committee of the RBI to look at the PCA framework to see if certain banks under the PCA should be given some relaxation, reports CNBC-TV18's Shereen Bhan, citing unnamed sources. 

The RBI will allow loan restructuring for MSMEs, reports CNBC-TV18, citing what unnamed sources told news agency Reuters.

The RBI board meeting ended on a 'cordial note', reports CNBC-TV18, citing what unnamed sources told news agency Reuters
RBI will form a panel to review its surplus funds and transfer to the government, reports CNBC-TV18, citing what unnamed sources told news agency Reuters.

RBI will take measures on improving liquidity and ease restrictions on select state-run banks' reserve ratio, reports CNBC-TV18, citing what unnamed sources told news agency Reuters.

What we know at the moment
1) There are indications that the RBI may be willing to ease lending norms for MSMEs but liquidity to NBFCs remains a sticking point, reports PTI.  
2) It may also be open to injecting liquidity through open market purchases of bonds but is resisting relaxing capital buffers for banks, reports PTI.
3) Discussions in the meeting may also have focused on the massive Rs 9.69 trillion reserves of the RBI, with Gurumurthy and the finance ministry wanting it to be lowered in line with global practices, reports PTI.
The RBI board meeting has just concluded. A statement from the central bank is expected soon.  
All board members are leaving the RBI headquarters, reports CNBC-TV18.  
Two RBI board members -- Sudhir Mankad, an independent board member, and Sachin C -- leave from the RBI board meeting, reports CNBC-TV18

Most banks, including those under PCA, meet mandatory priority sector lending for MSMEs

Amid a raging debate on need for easing rules governing credit to MSMEs, an analysis of the RBI's data on such loans show that a large majority of banks, including those facing 'prompt corrective action', have achieved the mandatory priority sector lending targets for micro-enterprises, news agency PTI reported on Friday.  (Read more here)  
Centre's proposal for closer supervision of RBI not to be taken up today
On Friday evening, there were reports that the Centre was proposing changing rules that would enable closer supervision of the central bank. It has also recommended that the RBI board draft regulations to enable setting up of panels to oversee functions including financial stability, monetary policy transmission, and foreign exchange management. However, sources said this was a held over item from the last board meeting agenda. On Saturday, officials confirmed to Business Standard that the issue would not be taken up on Monday. (Read more here)  
The RBI board's independent directors may take decisions if the standoff between the RBI and the government continues. (Read more here)  
How a truce was brokered between the government and RBI
The government and the RBI appeared to have reached a truce on a number of issues ahead of the Monday meeting, Business Standard had reported on Saturday. This softening of stand by senior figures on both sides of this prolonged dispute was expected to lead to concrete resolution on at least two issues — prompt corrective action (PCA) and a special refinance window for non-banking financial companies (NBFCs). The efforts to secure a "ceasefire" between North Block and Mint Road were led by people in the top-most levels of government. (Read more here)   
The RBI board is in a huddle at present, with all 18 board members in attendance, amid an open rift between the government and the central bank, reported CNBC-TV18. 

Govt proposes change in rules for closer oversight of RBI, empowering board
On Friday, citing unnamed sources with knowledge of the matter, Bloomberg had reported that the government had proposed changing rules that would enable closer supervision of the RBI. The move was meant to empower the regulator's board, which includes government nominees, and give it a supervisory role, the sources had said. (Read more here)   
Jaitley's concerns
Two days before Monday's meeting of the RBI's central board, Finance Minister Arun Jaitley had said that growth must not be throttled by limiting credit availability and liquidity. (Read more here
Here's why RBI's Urjit Patel should hold firm
Under pressure to return surplus capital to a resource-strapped government, Patel should borrow an idea from Buiter's paper to argue that very little of the central bank's assets and liabilities are actually visible. For New Delhi to covet what's in sight of the accountants would be like a ship's captain deciding to go over a small chunk of ocean ice, ignoring the risk of ramming into a submerged iceberg. (Read more here)  
A short history of RBI's turbulent relationship with the government 

Think the present rift between the RBI and the government is a new thing? T C A Srinivasa-Raghavan brings you the history of the clashes between the central bank and the government. (Click here
Section 7 may be off the table
The government has made up its mind it will not use a contentious provision (Section 7) of the RBI Act to issue directions on its suggestions to the central bank, sources told Business Standard on Sunday. (Read more)  
Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders. These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. 
PCA framework issue explained
The PCA framework kicks in when banks breach any of the three key regulatory trigger points, namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA). Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government is in favour of this practice being adopted for the domestic banking sector as well, according to PTI. (Read more)    
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. 
Some officials, as reported earlier by Business Standard, have also sounded out independent directors that the board meeting may continue on Tuesday if all issues are not resolved on Monday. 
Patel to stay
While there have been reports and demands from some quarters for the Governor to step down, sources told news agency PTI that Patel was unlikely to yield under pressure and would rather mount a strong defence of the central bank's policies regarding stringent NPA recognition norms, as well as measures taken to ease credit supply to MSMEs.  (Read more
The RBI is 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 had told Business Standard earlier. (Read more
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. (Read more)  
RBI's capital: Current Account Deficit countries can see outflow of reserves.
RBI meeting to go on for a long time, according to sources.
First half of RBI board meeting comprised presentation on RBI's capital.
Top gainers include Yes Bank, ITC, Tata Motors, IndusInd Bank, Reliance Industries and Vedanta, rising up to 7.19 per cent.
While, top losers include ONGC, ICICI Bank, SBI and Asian Paints, falling up to 1.37 per cent.
With nothing official emerging from the meeting so far the bond and stock markets showed little movement.
The S&P BSE Sensex ended at 35,775, up 318 points or 0.9 per cent, while the broader Nifty50 index settled at 10,763, up 81 points or 0.8 per cent.

For details, click HERE
The benchmark indices ended nearly 1 per cent higher ahead of the outcome of the RBI board meeting.
RBI's credibility, reputation could be irretrievably damaged: Chidambaram

P Chidambaram said: "If the governor stands his ground, as our hope is he will, the government is planning to issue a direction to the RBI under section 7 directing the RBI to transfer Rs 1 trillion into the government's account.
"In that event, the governor has only two options. One, to transfer the money, or two, resign.
"In my view, whichever option is taken by the governor, it will irretrievably damage the credibility and reputation of the RBI. It will also mean capture of the RBI by the government. One more crucial institution will fall from grace."
Days before the RBI meet, finance minister P Chidambaram said the chain of events could "irretrievably damage" the credibility and reputation of the apex bank.
Ahead of the crucial RBI Board meeting, Congress President Rahul Gandhi Monday accused Prime Minister Narendra Modi of destroying institutions and hoped Reserve Bank Governor Urjit Patel has a "spine" and will show the prime minister "his place".
The benchmark indices are trading nearly 1 per cent higher amid RBI's board meeting.

The corrective action plan has led to sharp slowdown in lending in 11 state-owned banks.
Local news agency Cogencis, citing sources, also said the central bank was open to reviewing the corrective action plans, according to TV channel ET Now.
The report also said that the RBI would stay strict on bad loan norms and wanted the government to commit more for the health of state-run banks.

The Indian rupee strengthened to 71.625 per dollar versus 71.92 on Friday.
RBI Board meet: Top government officials and one independent director have pressed the RBI to ease lending and capital rules for banks, provide more liquidity to the shadow banking sector, support lending to small businesses and to let the government use more of the RBI's surplus reserves to boost the economy.
Last month, RSS-affiliated Swadeshi Jagran Manch said the RBI governor should work in sync with the government or resign.
"The Reserve Bank of India Governor should work in sync with the government or otherwise resign," SJM's co-convener Ashwani Mahajan had said.
In his first public comments since the spat between the RBI and the finance ministry came out in the open, Swadeshi ideologue S Gurumurthy had last week said the stand-off "is not a happy thing at all".
Gurumurthy, who was appointed to the board of RBI a few months back, had said the capital adequacy ratio prescribed in India is 1 per cent higher than the global Basel norms. He also pitched for easing lending norms for small and medium enterprises, which account for 50 per cent of the country's GDP.
RBI deputy governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be "potentially catastrophic" for the economy.
Meanwhile, finance minister Arun Jaitley on Saturday said that growth must not be throttled by limiting credit availability and liquidity.
It is necessary that the growth process does not suffer due to the cleaning up of the banking system from the "collectively committed sins" during 2008-14 when the regulatory mechanisms also overlooked high debt accumulation, he said.
Amid growing tensions with the central bank, the finance ministry had sought discussions under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI governor.
The last meeting on October 23 had proved inconclusive on many fronts after eight hours of discussions, according to reports.
Key Indian indices advanced over 0.5 per cent on positive expectations from the RBI Board meeting currently underway on Monday, as the Sensex gained over 240 points and the Nifty50 traded above the 10,700-mark during the afternoon session of the trade.
"In the hope of relaxation in the Prompt corrective action (PCA) framework norms in the RBI meet, the PSU banks had opened in the green today," Astha Jain, Senior Analyst, Hem Securities, told IANS.
Patel and his deputies along with a few independent directors too are expected to support the central bank's mission to clean up bank balance sheets, sources said.
Objective of meeting:
To discuss disagreements, diffuse ongoing rift between govt and RBI and arrive at a decision on Centre's demands.
RBI wants government to commit more for health of State-run banks
RBI open to review of State-run banks Corrective Action Plans: Sources
RBI has no fixed position on Correction Action Plan: Banking sources told CNBC.
RBI Board members take a short break from the meeting. The session will continue after lunch.
RBI Board meeting: 
Govt To discuss liquidity, credit issues
Liquidity squeeze in NBFCs to be looked at
Fixing RBI's capital framework to be discussed
For weeks, government officials have been pressuring the 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.
Bloomberg columnist says Urjit Patel let RBI and India down by not resisting demonetisation. He should resist Modi’s new bad ideas now

Key developments ahead of the RBI's board meeting today:
1. Govt not to use Sec 7 to give directions to RBI
2. S Gurumurthy's speech could have made things worse
3. Some independent directors in favour of resolution through majority voting
PSU banks trade mixed ahead of RBI board meet

Shares of public sector banks (PSBs) were trading on a mixed note.
Bank of Maharashtra, Syndicate Bank, Vijaya Bank and Central Bank of India were up 2% each, while Dena Bank, Andhra Bank, Bank of Baroda, Corporation Bank, Indian Overseas Bank and Allahabad Bank were up 1% each.
The rupee declined 0.1 percent to 72.03 per dollar on Monday after strengthening 0.8 per cent last week. India’s benchmark 10-year bond yield climbed one basis point to 7.83 per cent.
Shares pared most of their early gains to trade marginally higher on Monday, as the central bank held a board meet to discuss several issues related to liquidity, lending rules for banks and handing over surplus reserves to the government.
This is the first meeting to be held since the extent of a deep rift between the RBI and the government became public.
With nothing emerging from the meeting so far financial markets showed little movement.
The 10-year benchmark bond yield was at 7.81 percent compared with 7.82 at Friday's close, while the Indian rupee was at 71.89 per dollar versus 71.92 on Friday.
The broader NSE stock index was little changed at 0.3 percent.
Investors were on guard against any resurrection of the row between the central bank and government officials, but few were expecting fireworks as both sides have tried to dispel fears of a more serious falling out.

Track LIVE market updates, HERE
Unhappy over the pressure, RBI Deputy Governor Viral Acharya had warned that undermining central bank independence could be "catastrophic".
RBI trains 11,000 bank officers on MSME credit

While a debate is going on whether the RBI should do more to ease credit to MSMEs, officials said the central bank has provided special training to nearly 11,000 officers at various commercial banks on lending to micro, small and medium enterprises.
This training has been provided to officers working at nearly 3,000 bank branches covering all districts in India through more than 2,000 special workshops in the last three years, officials said.
PSU banks gain in trade, amid crucial.
CIC again asks PMO, RBI to disclose wilful defaulters' list, Rajan's letter

Severely admonishing the RBI and the PMO, the Central Information Commission has again directed them to disclose the list of wilful defaulters and Raghuram Rajan's letter on bad loans.
In an exhaustive 66-page order, the panel pulled up the Prime Minister's Office for not complying with its directive to disclose the letter from former RBI Governor Rajan on bad loans.

Click HERE to read more
On rift with RBI, Finance Minister Arun Jaitley had said that growth must not be throttled by limiting credit availability and liquidity.
RBI Deputy Governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be "potentially catastrophic" for the economy.
RBI board likely to debate liquidity crisis

The RBI's crucial board meeting may take up the liquidity crisis that initially triggered a tiff between the government and the central bank, according to sources.
Amid demands from some quarters for RBI governor Urjit Patel's resignation, Chairman of the Parliamentary Standing Committee on Finance Veerappa Moily Sunday said if he quits over the stand-off between the top bank and the Centre, it will send a bad signal to global markets.
Speaking to ET, Nitin Gadkari said, "don't want to meet RBI Governor due to a bad experience."
Among a range of issues that will dominate RBI board meet , most crucial are whether board can be given more power over RBI and how strict should be rules governing weak banks.
Congress National media panellist Jaiveer Shergill tweeted: RBI must keep in mind that if they agree to #BJP Govt proposal then they shall be wheeling in the “Trojan horse” which will ultimately dismantle the institutions Independence & credibility apart from usurping the cash reserves #RBIBoardMeet

What is expected in today's meeting
- 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
RBI may blink on PCA, not on NBFC window in today's board meeting

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. Read the full story here
Economic Affairs Secretary Subhash Chandra Garg had also clarified that the government wasn't in any dire needs of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 trillion.
The government on November 9 had said it was discussing an "appropriate" size of capital reserves that the central bank must maintain but denied seeking a massive capital transfer from the RBI.
The meeting is being held in the background of tension between the Centre and the RBI after Finance Ministry cited the never-used-before Section 7 of the RBI Act which empowers the government to issue directions tothe RBI Governor.
The Congress has accused the Modi government of destroying every institution in the country and the latest one being the Reserve Bank of India.
Rahul Gandhi tweeted: Mr Modi and his coterie of cronies, continue to destroy every institution they can get their hands on. Today, through his puppets at the #RBIBoardMeet he will attempt to destroy the RBI. I hope Mr Patel and his team have a spine and show him his place.
Swaminathan Gurumurthy, a chartered accountant turned newspaper columnist, set the tempo by chiding the monetary authority for being too tough in its efforts to rid banks of bad debts and arguing the case for lower reserves -- a step that would give the government more cash ahead of an election year.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel