Mumbai/New Delhi: In the end, expectations of an escalation of the confrontation were belied. The government and the Reserve Bank of India (RBI) stepped back from the brink and found a middle ground, giving both sides crucial space to revisit their positions.

Given that the contentious issue of liquidity—particularly pertaining to non-banking financial companies (NBFCs)—is yet to be addressed to the satisfaction of the union government, the truce is an uneasy one. The finance ministry believes NBFCs are facing an acute liquidity crisis, which was spilling over into the real estate sector and small businesses.

After a marathon board meeting that lasted more than nine hours on Monday, RBI made concessions on capital adequacy of banks, while two contentious issues of transfer of surplus reserves and relaxing norms for weak banks were referred to committees.

With this, the threat of invoking Section 7 of the Reserve Bank of India Act, 1934, that would have brought the central bank-government relationship to a new low now seems to have passed.

The board has advised RBI to let banks recast loans up to 25 crore given to micro, small and medium enterprises (MSMEs).

The issue of transfer of excess RBI reserves to the central government has been referred to an expert committee, the membership and terms of reference of which would be finalized jointly by the government and RBI, the central bank said in a statement.

Fixing the economic capital framework of RBI or the capital required by the central bank in different risk scenarios has also been a sore point.

Fixing a capital framework could free up RBI’s surplus reserves for transfer to the central government. The government is struggling to meet its fiscal deficit target of 3.3% of gross domestic product in the face of lacklustre tax collections, and a massive surplus transfer will help it in bridging the gap.

The central bank contends that the reserves are crucial for it to ring fence the country at the time of a crisis.

Further, the board did not yield to demands of bringing down the capital adequacy ratio in line with bare minimum levels prescribed by Basel III norms. However, it has yielded and provided another year for implementation of the capital conservation buffers.

“The Board, while deciding to retain the CRAR (capital to risk weighted asset ratio) 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," RBI said in the statement.

The issue of easing the prompt corrective action (PCA) framework for weak banks has also been referred to a committee, with the government pushing for a review to allow a few state-run banks out of this framework. Eleven of the 21 state-run banks are under RBI’s PCA framework, which the government believes is restricting credit flow to key sectors of the economy, including MSMEs.

“The meeting was very comprehensive and ended on a cordial note and did not see any voting by members," said a board member on condition of anonymity.

The next meeting of the RBI board is likely to take place on 14 December.

However, there seems to be no consensus on addressing the liquidity shortage faced by NBFCs flagged by the union government. Instead, RBI announced that it would inject 8,000 crore liquidity through open market operations on 22 November.

To ease the liquidity crunch faced by NBFCs, State Bank of India had in October announced that it would buy loans worth 45,000 crore from non-banks.

In addition, to ease the liquidity squeeze faced by housing financiers, the refinance window of National Housing Bank was increased to 30,000 crore.

Maulik Pathak in Ahemdabad contributed to this story.

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