RBI vs Govt: Urjit Patel met Narendra Modi on 9 November to thrash out issues2 min read . Updated: 13 Nov 2018, 04:45 AM IST
There are indications that RBI will create a special dispensation for SME lending, but it wasn't clear if an agreement was worked out to address India's liquidity crisis and the debate over RBI reserves
New Delhi: RBI governor Urjit Patel is believed to have met Prime Minister Narendra Modi last week in a bid to work out a solution on contentious issues that have been flash point between the Reserve Bank of India and the government during the last few weeks. People aware of the matter said Patel was in New Delhi on Friday and met senior officials in the Prime Minister’s Office (PMO).
The meetings, which some said also included with the prime minister, came amid a faceoff between the central bank and the finance ministry over issues ranging from appropriate size of reserves that RBI must maintain to ease of lending norms to step up growth in an election year.
According to the people quoted above, there are indications that RBI may create a special dispensation for lending to small and medium enterprises, but it was not immediately clear if an agreement has been worked out to ease liquidity situation for non-banking finance companies (NBFCs) and the RBI parting with its substantial part of its surplus.
Tensions between RBI and the government have escalated recently, with the finance ministry initiating discussion under the never-used-before Section 7 of the Reserve Bank of India Act, 1934, 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.
Last week, economic affairs secretary Subhash Chandra Garg had said the government was not in any dire need of funds and that there was no proposal to ask the RBI to transfer ₹ 3.6 trillion. He further said the only proposal “under discussion is to fix appropriate economic capital framework of RBI".
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Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. RBI has ₹ 9.59 trillion in reserves.
Patel’s meetings at the PMO came days before the RBI board meeting on 19 November during which contentious issues are likely to come up for discussion. The government nominee directors and a few independent directors could raise the issue of interim dividend along with capital framework of RBI. However, any change in the central bank’s economic capital framework can be carried out only after making amendments to the RBI Act.
Other issues which could be raised include alignment of capital adequacy norms with those in advanced countries and some relaxation in the Prompt Corrective Action framework, the people said, adding more measures to enhance lending to MSMEs and NBFCs may also be discussed.