The government and RBI are looking to reach at an agreeable solution with respect to relaxation of the PCA framework and easing of lending norms for the MSME sector.
New Delhi| The RBI and the government have decided to form a committee to design RBI’s capital framework, govt sources said. The information comes a day after the RBI and government officials held a marathon meeting to iron out the differences between them.
The composition of the committee proposed will be decided by the RBI Governor and Finance Minister together, said sources. The funding details to the MSMEs have also been decided in the meeting.
The ongoing rift with the government was expected to play out at the RBI’s crucial board meeting. with the Finance Ministry nominees and some independent directors expected to take on Governor Urjit Patel and his team over issues ranging from MSME credit to the central bank’s reserves, though both sides are in favour of reaching a common ground.
The RBI’s central board currently has 18 members, though the provision is that it can go up to 21. The members include Governor Urjit Patel and his four deputies as ‘full-time official directors’, while the rest 13 have been nominated by the government, including two Finance Ministry officials — Economic Affairs Secretary and Financial Services Secretary.
Sources said the government and Reserve Bank of India (RBI) are looking to reach at an agreeable solution with respect to relaxation of the Prompt Corrective Action (PCA) framework and easing of lending norms for the MSME sector. If not in this board meeting, the issue of relaxation of PCA framework would reach a resolution in the next few weeks, they added. As a result of the relaxation, some banks may come out of the PCA framework by the end of this fiscal.
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.
The government feels that the MSME sector — which employs about 12 crore people and plays a critical role in the economy — needs some support after being impacted by demonetisation and implementation of the Goods and Services Tax (GST). However, the central bank has been averse to the government’s demand as it considers the sectors to be vulnerable.
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.
S 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.
Last month, RSS-affiliated Swadeshi Jagran Manch said the RBI Governor should work in sync with the government or resign.