The decisions suggest efforts have been made to preserve the RBI’s operational autonomy. The risk of high profile exits from the RBI has proven to be overblown, and this should provide a near-term respite, said the Nomura report
The outcome of the board meeting of the Reserve Bank of India (RBI) suggests that a direct confrontation has been avoided and the more contentious issues have been deferred to committees, said a report authored by Sonal Varma and Aurodeep Nandi of Nomura India.
The decisions suggest efforts have been made to preserve the RBI’s operational autonomy. The risk of high profile exits from the RBI has proven to be overblown, and this should provide a near-term respite, it said.
RBI and the government in a crucial board meeting on Monday discussed numerous policy flashpoints on capital adequacy, the prompt corrective action (PCA) framework, the RBI’s surplus capital and liquidity support, among others.
The following key decisions were taken at the board meeting:
1. Basel regulatory capital framework: To retain the capital to risk-weighted assets ratio (CRAR) at 9 percent, but to extend the transition period for implementing the last tranche of 0.625 percent under the Capital Conservation Buffer (CCB), by one year (up to 31 March 2020).
2. Restructuring scheme for stressed Micro, Small and Medium Enterprises (MSMEs): The Board advised the RBI that it should consider a scheme for restructuring stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250mn.
3. PCA framework: For banks under the PCA, the matter will be examined by the Board for Financial Supervision (BFS) of the RBI.
4. Economic Capital Framework (ECF) of the RBI: The Board will appoint an expert committee to examine the ECF, the membership and terms of reference, which will be jointly determined by the government and the RBI.
According to Nomura, enabling more public sector banks to come out of the PCA framework will require more upfront capital injections (recap) from the government which we would expect over the next two months.
This along with initiatives on the loan restructuring of MSMEs (if implemented) may partly help contain the fallout from the shadow bank liquidity crisis, though a near-term growth slowdown is still inevitable, it said.
The issue of excess RBI capital being transferred to the government is still to be decided. According to news reports, the next board meeting scheduled on 14 December will likely discuss liquidity and governance issues.
