Why the RBI board needs to be recast

Why the RBI board needs to be recast


  1. The article discusses about the reconstitution of the RBI board following a meeting between  government and Reserve Bank of India on the contentious issues in the board meeting held recently.

Important Facts:

2. The Reserve Bank and the government have agreed to refer to an expert committee the following issues:

  • The appropriate size of reserves that the RBI must hold and transfer of surplus reserves.
  • Relaxing norms for weak banks with the government pushing for a review to allow a few state-run banks out of the  Prompt Corrective Action (PCA) .

3. About the committee: RBI has agreed for setting up of an expert committee on the economic capital framework (ECF) and its mandate is restricted to future earnings and not the existing reserves.

  • The membership and terms of reference will be jointly determined by the Government of India and the RBI.

4. Decisions taken during meeting:

  • On the issue of capital adequacy ratio, after much deliberations to reduce it to 8%, it was finally retained at 9%.
  • Fixing a capital framework could free up RBI’s surplus reserves for transfer to the central government.
  • The government is struggling to meet its fiscal deficit target of 3.3% of gross domestic product in the face of lacklustre tax collections, and a massive surplus transfer will help it in bridging the gap.
  • The central bank contends that the reserves are crucial for it to ring fence the country at the time of a crisis.
  • It also agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020.
  • On the PCA, Board for Financial Supervision (BFS) of RBI will review the norms and decide if some of the parameters like net non-performing asset (NPA) ratio could be relaxed so that some of the banks come out of the PCA.
  • There are 11 public sector banks out of 21 that are on PCA. The BFS consists of governor, four deputy governors and few other board members.
  • The PCA framework kicks in when banks breach any of the three key regulatory trigger point namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).
  • Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government is in favour of this practice being adopted for the domestic banking sector as well.
  • The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to ₹250 million [₹25 crore] , subject to such conditions as are necessary for ensuring financial stability.

5. Unresolved Issues:

  • The liquidity shortage faced by NBFCs: The finance ministry believes NBFCs are facing an acute liquidity crisis, which was spilling over into the real estate sector and small businesses.
  • RBI announced that it would inject ₹8,000 crore liquidity through open market operations soon.

6. Background: The tension between RBI and the government was started with the latter referred to section 7 of the RBI Act for consultation on these issues. Section 7 gives the power to the government to issue direction to RBI.

7. Issues with the board:

The board has members from the corporate world who have a stake in the financial markets, which poses serious conflict of interest.

For example, the present board has N. Chandrasekaran, who is the chairman of Tata Sons, the holding company and promoter of more than 100 Tata operating companies, including Tata Capital (a non-banking finance company).

8. Way forward:  Thus to avoid conflict of interest, the RBI board should be reconstituted with academicians and technocrats who have no business interest in financial markets and could aid the RBI management with valuable inputs.


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