Key takeaways from the Centre & RBI board meeting

The Reserve Bank of India had a 9-hour board meeting with the Government of India on 19th November. They discussed multiple issues in the meeting. The key decisions taken by the board were:

  • It has been decided to constitute an expert committee to review the economic capital framework of the Reserve Bank of India. The membership and other terms of the expert committee will be jointly determined by the Government and the RBI. There has been a conflict regarding transfer of surplus money from the RBI to the Government. The RBI is reluctant to transfer more surplus in the form of dividend to the Government as it feels it will erode its capital base and also stoke inflation in the economy. On the other hand, the Government is arguing that the RBI is being conservative in its estimate of capital requirements and is hoarding reserves. Also, the RBI has one of the highest reserve ratios in the world. So, the expert committee will review the capital calculation methodology of the RBI.
  • Loan restructuring Scheme for MSMEs: The RBI has agreed to bring out a loan restructuring scheme for Small and  Medium sector Enterprises (SMEs) subject to the conditions of financial stability. This scheme will be applicable to MSMEs with a loan exposure of up to Rs.25 crores. It will help the small businesses who were affected by the twin shocks of demonetisation and GST.
  • Review Prompt Corrective Action (PCA) framework: If the financial health of a bank worsens beyond the limit set, the RBI puts the bank under a special watch category and imposes certain restrictions (including lending restrictions) on it. This is known as Prompt Corrective Action. The RBI has agreed to review the PCA framework and ease lending restrictions on some banks to ease liquidity in the system. The Board for Financial Supervision (BFS) will examine the matter .(The BFS is an autonomous body under the RBI)
  • Ease liquidity: The Non-Bank Financial Institutions (NBFCs) have been facing a difficulty in raising money after the bankruptcy of Infrastructure Leasing & Financial Services (IL&FS). The RBI has agreed to ease liquidity in the system by buying Government securities worth Rs.8000 crores (also known as Open Market Operations) on November 22.
  • No change in Capital Adequacy Ratio (CAR): It has been decided not to decrease the capital adequacy ratio of the banks from 9 % to 8 %. The Capital Adequacy Ratio is the ratio between the capital and risk-weighted assets of a bank. Basically, higher the CAR, higher the capital requirements of the banks and hence their lending may get affected.
  • The next meeting is scheduled to be on 14th December.

So, this is the summary of the key takeaways from the meeting. The Government and the RBI have agreed to find a middle ground on most contentious issues like transfer of surplus, review of PCA etc.

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