RBI move a small victory for govt, say Finance Ministry officials

RBI board decided to constitute an expert committee to examine the economic capital framework of the central bank

The Union government considers the decisions taken by the central board of the Reserve Bank of India (RBI) a small victory in the direction of bringing accountability in the decisions of the central bank, several finance ministry officials said.

“For the first time, the (central) board has started functioning as a board,” said a senior official, requesting anonymity. Though no resolution was passed in the board meeting on Monday, sources said, the central bank’s official statement referred to certain “decisions” taken by the board.

According to the RBI statement, the board decided to constitute an expert committee to examine the economic capital framework (ECF) of the central bank. Sources said Finance Minister Arun Jaitley and RBI Governor Urjit Patel will take a call on the members and terms of reference of the committee to be set up within a week. The RBI board further “decided” to retain the capital to risk-weighted assets ratio (CRAR) at 9 per cent, as against the government’s demand to reduce it to 8 per cent in alignment with the Basel framework followed globally.

“The RBI board took some decisions on Monday following a consultative process. Earlier, the RBI board would put various decisions taken by committees set up by the central bank for the sake of information of the board members. The committees are dominated by the brass of the RBI,” said a senior government official.

The government has also geared up for a resolution in the board meeting through a voting process in case both sides didn’t agree on key issues. However, both sides settled for a compromise and there was no voting. “The meeting was cordial. In the meeting, six presentations were made by two secretaries of the finance ministry and RBI deputy governors,” a board member said, requesting anonymity. The presentations were on ECF, prompt corrective action (PCA), among other issues.

Senior government sources aware of the deliberations in the RBI board meeting on Monday said the independent directors were broadly in consensus with the government’s view on ensuring more credit to the industry, especially the small and medium enterprises, and the need for more liquidity in capital markets.

“The decisions taken in the meeting reflected the board agreement with the Centre’s stance,” said an official. The government believes that a direct outcome of the board meeting is that while the position of the RBI governor retains its primacy, the role of the board of directors has also gained importance. This “reality” will set the tone for future RBI board meetings, another official said.

What helped the RBI and the government arrive at a middle ground on various issues was that top finance ministry officials were in regular touch with the RBI management in the run-up to the board meeting, sources said. The government will push for further reforms in the governance structure of the RBI in the upcoming board meeting to be held on December 14. About eight-nine months ago, government nominees on the RBI board proposed an agenda item titled “governance in RBI”, proposing reforms in the decision-making process of the central bank.

The government was particularly upset about being kept in the dark on the RBI’s new non-performing asset norms that came to be popularly known as the February 12 circular. A senior government official said the finance ministry was not even mar­ked a copy of the regulations at the time of issuing it. According to sou­rces, the government has proposed “drastic changes” in the rules framed to determine the composition of the Board for Financial Super­vi­sion, the Board for Payment and Set­tlement Systems and the Com­mittee of the Central Board. The governme­nt wants more participation of independent directors in these committees.

Before the meeting held on Monday, government officials had stressed that it wants more accountability in the decision-making of the RBI through consultations in the board. The RBI’s central board has 18 members — RBI Governor Urjit Patel and four deputy governors, four officials from its local board, seven independent directors, along with Economic Affairs Secretary Subhash Chandra Garg, and Financial Services Secretary Rajiv Kumar.

Finding a solution to the cold war

• Finance Minister Arun Jaitley and RBI Governor Urjit Patel to decide terms and members of the economic capital framework committee within a week 
• Government officials think of the board meeting outcome as a small victory as it led to board-level decisions, instead of executive-level deliberations 
• The government to push for governance reforms in the RBI in the upcoming meeting scheduled on December 14