PCA norms, NBFC issues to be govt's priorities in Nov 19 RBI meet

When Economic Affairs Secretary Subhash Garg and Financial Services Secretary Rajiv Kumar walk into the Reserve Bank of India’s (RBI’s) board meeting on November 19, their priority will be on two points: Getting the RBI board of directors to pass a resolution on easing of prompt corrective action (PCA) norms, and on a special refinance window for non-banking financial companies (NBFCs), housing finance companies (HFCs) and mutual funds.

All other contentious issues between the government and the RBI, including a new economic capital framework and the additional surplus arising out of it, regulation of state-owned banks, payment regulations, and others — will be dealt with later, highly placed sources said.

“The main issues that require resolution are those of credit by easing PCA norms, and liquidity by providing a special window for NBFCs. The discussion on other issues will continue,” said a top government official.

Getting a resolution on these two issues is the Centre’s top priority, and it is doing everything from its end to ensure that there is a solution. Business Standard has learnt from sources that informal conversations are being held with independent directors as well, to convince them to get the RBI and the government’s representatives on the RBI board on the same page on these issues.

Given the current coldness between the RBI and the government, the onus will be on the independent directors to call upon a “truce” between their representatives on the board. Garg and Kumar are the government’s representatives, while RBI Governor Urjit Patel, and the four deputy governors are the central bank’s representatives.

However, there is an apprehension within the government, that although the Centre may try its best to reach any solution, and be as diplomatic as possible, there may not be any reciprocal moves from the central bank, which has stuck on its stance so far on all contentious issues.

The government feels that if a resolution is reached on these issues, it can then choose to take up other issues with the RBI later. This includes the contentious point of economic capital framework. As part of the past discussions on the framework, the government told the RBI that according to its calculations, the RBI can free up to Rs 3.6 trillion. The final decision on how much to pay will lie with the central bank.

The government wants the RBI to align its regulatory capital norms and the PCA framework with Basel-III guidelines, an international regulatory framework for banks. There are 12 banks under PCA, 11 state-owned and one private. Being under PCA has restricted their lending activity, especially to the small and medium sector enterprises. This has left the Modi government worried, especially with ongoing assembly elections and the 2019 general elections not too far away. It wants easing of the norms to kickstart lending activity to the MSME sector.

On the issue of NBFCs, government officials said since a lot of homebuyers and vehicle buyers have turned to NBFCs for their loan requirements because of restrictions on banks, it was imperative that there was no liquidity crisis in the sector. 

The government had raised concerns with the RBI on the liquidity crisis among HFCs and smaller NBFCs.

However, the RBI’s stated position so far is that there is no systematic cash crunch and hence there is no need for a special refinance window for NBFCs. Last month, the RBI had announced regulatory relaxations and incentives, giving banks room to lend more to NBFCs and HFCs in a bid to increase liquidity. The measures were in the wake of the lending freeze witnessed following the IL&FS crisis.