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Board committees to assist RBI

Board committees to assist RBI

The committee will determine the level of reserves the central bank should hold vis-à-vis its assets so that the excess can be transferred to the government.

"One way that government influence could now manifest itself is through the formation of the two panels".

"The RBI appears to have gone some, albeit not all the way, towards appeasing the government in its demands", Kotecha said.

It was also agreed that the membership and terms of reference of the panel will be jointly determined by the government and the Reserve Bank of India.

A litany of demands from top finance ministry officials prompted warnings from RBI Deputy Governor Viral Acharya last month that undermining central bank independence could be "catastrophic", triggering a public feud between the bank and the government.

Last week, Finance Minister Arun Jaitley said there is a need to minimise NPAs in order to maintain the strength of the banking system and enable it to help the economy grow.

Markets had been on edge Friday following rampant speculation that Patel would resign at a Monday board meeting in protest over the government's efforts to intefere in the bank's affairs.

He had also said the capital adequacy ratio prescribed in India is 1% higher than the global Basel norms.

Governments can easily be tempted to pressure central banks into keeping interest rates low for electoral reasons, but such decisions nearly always gives rise to fears over the inflation outlook.

The board also considered other issues related to the liquidity crunch in the economy and decided that the matter of relaxing the Prompt Corrective Action (PCA) norms to clean up the balance sheet of banks burdened with bad loans will be looked into by RBI's Board for Financial Supervision (BFS). Under PCA, weak banks are placed under a harsh framework that prevents them from accepting new deposits and lending money. The government had criticised the RBI for publicly talking about the rift. Thus, on the issue of capital transfer, government wins the round. This was done after the central bank was convinced that the financial mess in these banks was too severe to let them operate freely like healthy banks.

The Ask: Easing of lending norms to Micro, Small and Medium Enterprises (MSME) sector.

According to the statement issued by RBI, the Board has advised the apex bank to consider a scheme for restructuring of stressed standard assets of Small and Medium Enterprises borrowers with aggregate credit facilities of up to 250 million, subject to such conditions as are necessary for ensuring financial stability.

No timeline has been given for a specific conclusion on this issue, with sources telling The Wire that it will be debated once again at the next board meeting in December.

The 2018 crisis in Turkey, which saw the Lira depreciate by as much as 60% at one point, demonstrates just how messy things can get when governments come through the back door to appoint themselves as de facto heads of a central bank.

RBI extended the transition period to allow maintenance of capital conservation buffer (CCB) of 0.625% by one year till March 2020. Without a doubt, this action was part of the overall bad loan clean-up process initiated by the central bank in 2015.

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