Economics Prelims cum Mains

Board committees to assist RBI

The News

  • Recently a meeting was arranged between RBI and the government to settle their disputes and several key decisions were taken at the meeting.
  • The Reserve Bank of India (RBI) is set to get a makeover in line with its global counterparts, with several board committees to be formed on various aspects like technology, risk management, banking regulation, supervision, among others, to assist the central bank in its operations.
  • Proposed by the government, the issue will be discussed in the next board meeting of the central bank.
  • The other issues to be discussed in upcoming meetings: improving governance standards of the RBI and liquidity facility to non-banking finance companies.

Significance of the move

  • The aim is to move to a system of rule-based decision making from the present discretion-based one.
  • The move is also seen to make the RBI management accountable to the board and making the board more hands-on.

Background

  • RBI governor Urjit Patel’s tenure started seemingly cordially, with the governor seen to be backing demonetisation within weeks of his appointment in Sept 2016.
  • But ties soon soured over the issue of interest rates when the MPC led by him refused to meet chief economic adviser Arvind Subramanian ahead of a decision on rates.
  • Starting with the issue of interest, many points of contentions between the RBI and the government came into the light, due to which a high-level committee was discussing on the probability of invoking section 7 of the RBI Act if the logjam between the two persists.
  • Section 7 gives the power to the government to issue direction to RBI.
  • A meeting was arranged to settle many disputes between RBI and the government.

What were the decisions taken at the meeting?

After discussing several contentious issues during the nine-hour long board meeting, decisions were taken on four aspects:

  1. Forming a committee on RBI’s economic capital framework
  • The capital infusion programme from the government, which has been the only source of capital for these banks, gets relaxed because of the revised framework.
  • Calculations suggest that the government has probably received a relief of $1.7 billion because of the delay in transition as they would have had to infuse this capital by FY2019.
  1. Debt recast scheme for micro, small and medium-sized enterprises
  • The debt recast for MSMEs, the scheme will be applicable only to standard assets that are under stress and for loans for up to ₹25 crore.
  • RBI will now prepare the fine print for the scheme and will take about 15 days to announce it formally.
  1. Extending the deadline for last tranche of capital conservation buffer by one year and
  2. Review of banks under prompt corrective action by the Board for Financial Supervision (BFS).
  • The BFS that comprises the governor, four deputy governors and a few board members, will study the performance and earnings of banks of the first six months of the current fiscal that are under the prompt corrective action framework of RBI.
  • Accordingly, a decision will be taken to bring out some lenders from PCA depending on their performance.
  • At present, 11 out of 21 public sector banks are under the PCA framework.

Note :

  • According to a Kotak Securities report, several public sector banks that are under PCA will get some relief on the capital adequacy ratio as the deadline for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), has been extended by one year, that is, up to March 31, 2020.

 

About Section 7 of the RBI Act 1934

  • The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
  • Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
  • Till now this section has never been invoked.

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