Viral Acharya’s recent remarks discussed in heated manner at RBI Board meet: sources

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The RBI Board meeting concluded on a “cordial” note after 9 hours of marathon discussion over several topics ranging from liquidity to PCA norms to cash reserves. The central bank is expected to release a statement soon. Reports, however, suggest the RBI board may have reached on a conclusion over the issues of liquidity and easing out PCA norms. As per Reuters, the Central may form a panel to review RBI’s surplus funds and their transfer to the government, and the meeting ended on a cordial note.

Earlier it was said that though the RBI may not announce the special dividend to the government, it will most likely transfer nearly Rs 50,000 crore to the Centre this fiscal as well.

The government’s other suggestion to transfer excess reserves to the Centre, however, is likely to be decided by an expert committee to be set up by RBI. The Central bank has Rs 9.6 lakh crore of reserves in the form of contingency fund and forex and gold reserves and securities. These amount of nearly 28 pc of its total assets. Centre believes reserves amounting to 15-16 pc of total assets (the global average) are enough for RBI.

NPAs of power firms which have been a contentious issue after RBI’s zero-tolerance circular of February, 2018 may also see a relaxation at a later date.

The RBI Board has a total of 18 board members, including RBI Governor Urjit Patel. Though Urjit Patel has voting rights, his four deputies, including NS Vishwanathan, Viral Acharya, BP Kanungo and Mahesh Kumar Jain, don’t have voting rights but their roles are crucial.

The RBI and the Central government are at the loggerheads over the three most contentious issues for days now. The issues include a shortage of liquidity in the system, RBI’s strict Prompt Circular Action (PCA) norms against 11 banks, and how much reserves should remain with the RBI.

On the issue of liquidity in the system, the RBI believes that there is enough liquidity, while the government says there’s a shortage of over 1-lakh crore worth of liquidity. The State Bank of India in its latest report had also said there is a liquidity shortage of about Rs 90,000 crore in the system.

The government and the Reserve Bank of India (RBI) are also looking to reach an amicable solution with respect to the relaxation of the PCA framework and easing of lending norms for the MSME sector. Of the 21 state-owned banks, 11 are under the PCA framework. The PCA has imposed lending and other restrictions on these weaker lenders, hitting the MSMEs and NBFCs hard. The banks put under the PCA framework include 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.

Globally, PCA kicks in only when banks slip on capital adequacy ratio, and the government is in favour of this practice being adopted for the domestic banking sector as well. 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.

The third most contentious issue between the RBI and the government is cash reserves. Reports suggested the finance ministry had proposed to the RBI to transfer a surplus of Rs 3.6-lakh crore from the RBI’s reserves to the government, to be managed jointly by both. However, later the government clarified that it is not seeking transfer of Rs 3.6-lakh crore reserves from the RBI and that the only proposal under discussion is to fix appropriate economic capital framework of the central bank. “Lot of misinformed speculation is going around in media. Government’s fiscal math is completely on track. There is no proposal to ask RBI to transfer Rs 3.6 or 1 lakh crore, as speculated,” Economic Affairs Secretary Subhash Chandra Garg tweeted.

However, the Congress party accused the BJP of trying to seek funds from the RBI to offer freebies before the next Lok Sabha polls. “The facts which are emerging in the public space, the government wants the RBI to part with Rs 3.6-lakh crore out of Rs 9.59-lakh crore which constitutes the cash reserve of the RBI… And what is even more disturbing is that they perhaps want to use the money in order to give out freebies before the 2019 elections,” alleged Congress leader Manish Tewari.





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