In a nine-hour meeting at the Reserve Bank of India (RBI) headquarters, the central bank's board made a decision to constitute an expert committee to examine the economic capital framework (ECF) of the central bank.
Sources said the government and Reserve Bank of India (RBI) are looking to reach at an agreeable solution with respect to relaxation of the Prompt Corrective Action (PCA) framework and easing of lending norms for the MSME sector.
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 Rs 250 million, subject to such conditions as are necessary for ensuring financial stability.
The board of the RBI advised it to act to support small businesses and give banks more time to step up capital norms, following weeks of pressure from central government to spur lending ahead of elections.
The RBI's central board now has 18 members, including Governor Urjit Patel and his four deputies as full-time official directors, while the rest have been nominated by the government, including the Economic Affairs and Financial Services Secretaries.
The 18-member board meet was attended by Patel, four deputy governors, government nominees - Department of Economic Affairs secretary Subhash Chandra Garg and Financial Services secretary Rajiv Kumar, besides non-official directors, including S Gurumurthy and Satish Marathe.
Another flashpoint was the Centre asking that the RBI transfer surplus reserves to the government.
RBI-Centre standoff: Crucial meeting of central bank’s Board of Directors begins
"Glad that the Government has stepped back and grudgingly acknowledged the independence of the RBI", he said on Twitter.
The view of some of the directors on the board is that the RBI is holding excess reserves and that the government - which is the owner or the sole shareholder - should receive a larger share of the surplus or dividend.
In his first public comments since the spat between the RBI and the Finance Ministry came out in the open, Swadeshi ideologue S Gurumurthy had last week said the stand-off "is not a happy thing at all".
The disagreements The RBI board was unable to agree on providing higher liquidity to NBFCs, which is facing a massive cash crunch in wake of default by IL&FS.
According to a post-meeting release by the RBI, the board discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI. It was not. To understand this, let's look closer at the RBI statement. It did not budge from its position of reducing the ratio from 9% to 8% as demanded by the government.
The economic capital framework is likely to review these aspects. The RBI on the other hand has indicated that the government will have to infuse more capital (something the Centre is loathe to do), before it can let weak banks out of PCA. "November 19 will be a day of reckoning for central bank independence and the Indian economy", the former finance minister said.