MUMBAI: Reserve Bank Governor Urjit Patel met Prime Minister Narendra Modi last Friday to clear contentious issues that had caused an open war between the central bank and the finance ministry in the last couple of weeks. This comes ahead of the much anticipated November 19 RBI board meeting, rife with speculation about how stormy it would be, and the course of action Patel would take.
There was no confirmation from RBI on the meeting, but PTI and CNBC-TV 18, quoting unnamed sources, said Patel met officials in the PMO and also the PM. PTI said: “There are indications that RBI may create a special dispensation for lending to small and medium enterprises (SME),” but said it was not clear if there was an agreement over providing liquidity for non-banking finance companies or on parting with RBI’s surplus.
Finance ministry officials last week had raised the issue of “fixing” RBI’s capital framework – there are expectations that the board may discuss the norms and in all probability go in for an expert committee to asses that. Whether RBI would dilute norms of PCA (prompt corrective action) to help PSU banks that are under it to come out of it.
Tensions between the RBI and the government have escalated recently, with the Finance Ministry initiating discussion 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.
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 Rs 3.6 lakh crore.
He further said the only proposal "under discussion is to fix appropriate economic capital framework of RBI".
Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The Reserve Bank of India (RBI) has a massive Rs 9.59 lakh crore reserves.
Patel's meetings at the PMO came days before the RBI's crucial board meeting on November 19 during which contentious issues are likely to come up for discussion.
Sources said the government nominee directors and a few independent directors could raise the issue of interim dividend along with the 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, 1934.
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, sources said, adding more measures to enhance lending to MSMEs and NBFCs may also be discussed.
(with inputs from PTI)