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RBI Meet Agrees To Address Centre's Call To Share Surplus: 10 Points

Reserve Bank said the Board has decided to examine the Economic Capital Framework - the amount of surplus reserve a bank holds to tide over risks.

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RBI announced that it would inject Rs 8,000 crore worth of liquidity into the system.

The Reserve Bank of India's board met for more than nine hours in Mumbai today in the middle of an unprecedented power tussle between the government and the central bank. Sources say the meeting, which brought RBI chief Urjit Patel face-to-face with several nominees of the government, ended on a conciliatory note, with the central bank agreeing to set up a panel on sharing surplus reserves and restructure loans of small businesses up to Rs 25 crore. The RBI announced that it would inject Rs 8,000 crore worth of liquidity into the system through open market operations on November 22.
Here are 10 things to know about this big story:
  1. In a statement after the meeting, the Reserve Bank said the Board has decided to examine the Economic Capital Framework - the amount of surplus reserve a bank holds to tide over risks -- "the membership and terms of reference of which will be determined by the Government of India and the RBI".
  2. The volume of excess reserves was one of the key points of differences between the government and the Bank. S Gurumurthy, one of the government-nominated members of the Board, said while studies suggest that reserves could be 12 to 18.7 per cent of assets, the RBI has 27-28 per cent -- which amounts to 3.6 lakh crore. Sources said the government contended that the excess could be used for development.
  3. To provide relief to the Micro, Small and Medium Enterprises -- which employ 12 crore people -- the board advised the bank to consider a scheme for "restructuring of stressed standard assets" of borrowers with aggregate credit facilities of up to Rs 25 crore, the RBI said. Under this, MSMEs in financial difficulties will get concessions from the bank.
  4. Lending to non-banking financial companies and MSMEs was one of the key differences between the central bank and the government. While the bank took a hard line on the defaulters, the government wanted the bank to lend more to these sectors in view of the difficulties they faced during demonetization and the implementation of the Goods and Services Tax.
  5. On banks listed for Prompt Corrective Action or PCA -- a set of rules that come into action when ailing banks breach regulatory requirements -- it was decided that the matter will be examined by the RBI's Board for Financial Supervision. Contending that the existing framework of PCA is hurting credit flow, the government wanted the regulations eased.
  6. "The board, while deciding to retain the CRAR (Capital to Risk (Weighted) Assets Ratio) at 9 percent, agreed to extend the transition period for implementing the last tranche of 0.625 percent under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020," the statement further said.
  7. This could provide relief to banks that have massive bad debts and a low capital base. RBI has barred 11 state-run banks from lending and demanded that they shore up their capital base, which was another area of concern for the Centre.
  8. Earlier today, Congress chief Rahul Gandhi tweeted: "Mr Modi and his coterie of cronies, continue to destroy every institution they can get their hands on. Today, through his puppets at the #RBIBoardMeet he will attempt to destroy the RBI. I hope Mr Patel and his team have a spine and show him his place."
  9. There have been allegations that the government, keen on boosting economy in an election year, had asked the bank to part with a part of its surplus reserves. The Congress had said the amount could hover around Rs. 1 lakh crore crore.
  10. There were apprehensions that the government would invoke Section 7 of the RBI Act, a little-known never-used act that empowers the government to consult and give instructions to the central bank chief citing public interest.




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Highlights

1
RBI has barred 11 state-run banks from lending
2
The centre is concerned about RBI's restrictions on banks
3
RBI said that surplus reserves are essential for possible emergencies

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