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In Marathon meeting, RBI agrees to ease liquidity, increase credit to MSMEs

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Mumbai, Nov 19: The nine-hour marathon meeting of the Reserve Bank of India's central board saw mutual agreement being reached on several issues amid the ongoing rift between the government and the central bank.

Urjit Patel

"Based on an assessment of prevailing liquidity conditions and also of the durable liquidity needs going forward, the Reserve Bank has decided to conduct purchase of government securities under Open Market Operations for an aggregate amount of Rs 80 billion on November 22, 2018 through multi-security auction using the multiple price method," the RBI said in a statement on Monday.

The Central Board of the RBI also advised that the RBI should consider a scheme for the restructuring of stressed MSMEs.

"The Board also advised that the RBI should consider a scheme for the restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million (Rs 25 crore), subject to such conditions as are necessary for ensuring financial stability," the statement added.

The RBI board on Monday decided to form an expert committee to examine the economic capital framework of the central bank, which will decide the number of reserves it can maintain, handing over the balance to the government.

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

Amidst rift with Centre, crucial RBI board meeting ends after 9 hours

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 Rs 250 million, subject to such conditions as are necessary for ensuring financial stability.

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 that is 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.

RBI governor Urjit Patel and his deputies came face to face with government nominee directors -- Economic Affairs Secretary Subhash Chandra Garg and Financial Services Secretary Rajiv Kumar -- and independent members like S Gurumurthy to arrive at a middle ground on some of the contentious issues.

Glad govt acknowledged independence of RBI: Chidambaram

In the run-up to the board meeting, former Finance Minister P Chidambaram said Patel should step down if the board were to issue any direction to it on parting of capital reserves or relaxation of norms.

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 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.

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.

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.

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. 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.

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