RBI and govt signal truce on demand for transferring surplus reserves

A crucial meeting of the RBI's central board was held on Monday amid a rift between the central bank and the government over key issues

The Reserve Bank of India (RBI) on Monday signalled a compromise with the government by agreeing to study its demands, including the transfer of surplus reserves -- an issue that had triggered a public spat between the central bank and its political bosses.

The RBI's board met for nine hours in Mumbai and decided to set up an expert committee to examine the central bank's Economic Capital Framework (ECF). It also decided that the central bank's Board for Financial Supervision (BFS) will examine the issues concerning the banks that are under the Prompt Corrective Action framework.

The membership and terms of reference of the ECF committee will be "jointly determined" by the government and the RBI, said a press statement from the central bank.

The RBI agreed to consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million.

Top government officials and one independent director have pressed the RBI to ease lending and capital rules for banks, provide more liquidity to the shadow banking sector, support lending to small businesses and to let the government use more of the RBI's surplus reserves to boost the economy.

Unhappy over the pressure, RBI Deputy Governor Viral Acharya had warned that undermining central bank independence could be "catastrophic".

The public row led to speculation that RBI Governor Urjit Patel might resign, though officials have since sought to dampen such talk.

Business Standard on Monday had reported the RBI might agree at the board meeting to remove some banks from a so-called prompt corrective action plan as the government has made commitments to recapitalise them soon. 

The corrective action plan has led to sharp slowdown in lending in 11 state-owned banks.

The report also said that the RBI would stay strict on bad loan norms and wanted the government to commit more for the health of state-run banks. 

The RBI board comprises 18 members, of which five are from the central bank, two are government officials, four represent the regional RBI boards and seven are independent directors appointed by the government.

(With inputs from Reuters and Bloomberg News)