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Govt vs RBI: Urjit Patel meets PM Narendra Modi amid ongoing tussle

Reserve Bank of India Governor Urjit Patel met Prime Minister Narendra Modi on Friday to iron out issues on which the government and the central bank are not seeing eye to eye.
Sources said Patel was in New Delhi on Friday, when he met Modi and senior officials in the Prime Minister’s Office (PMO).
Some of the government’s demands the Reserve Bank of India (RBI) may accede to include relaxing prompt corrective action (PCA) norms for some banks and a special dispensation for micro, small and medium enterprises.
Top officials of the PMO didn’t respond to text messages from Business Standard. However, sources in Mumbai termed it a “routine meeting” and said some of the issues that had been the flashpoint between the central bank and the government were discussed.
“The emphasis is on working on solutions though there may be some differences,” the source said.
These talks come ahead of the upcoming meeting of the central board of the RBI on November 19, when the RBI and the government are supposed to hold formal talks on matters highlighted by the finance ministry.
It is not clear if an agreement has been worked out to ease liquidity for non-banking finance companies (NBFCs) and the RBI parting with its substantial part of its surplus. The RBI is not convinced about a liquidity crunch in the NBFC sector whereas the government has pressed the need to maintain the cash flow in the sector.
Further, the government has demanded a review of the economic capital framework of the RBI. The framework governs the risk capital that the RBI is required to keep with itself along with the amount of surplus that needs to be transferred to the Central government.
Over the past few days, the government and the RBI have had discussions in a bid to arrive at common ground on at least two demands of the government — easing PCA norms for some banks along with aligning the regulatory capital requirement of banks with international norms and a special dispensation for MSMEs.
Tension between the RBI and the government escalated particularly after the finance ministry initiated discussions with the regulator under the never-used-before Section 7 (1) of the RBI Act. The provision empowers the government to issue directions to the RBI, following consultations with the governor. The RBI had shown signs of discomfort with Deputy Governor Viral Acharya going public and talking about maintaining the independence of the central bank and how a potential compromise could be “potentially catastrophic” for the economy.
Among various demands, the finance ministry has suggested to the RBI doing away with the requirement of an exposure limit of 20 per cent of foreign portfolio investments in corporate bond portfolios of a single corporate group; removing the requirements of mandatory hedging for infrastructure loans of less than 10 years’ maturity; setting up a special refinance window for non-banking finance companies, housing finance companies and mutual funds; creating a facility for banks to raise $30 billion; and a review of the economic capital framework for bringing it in line with the requirements of the RBI Act.
Other suggestions were related to the application of Basel III norms to banks that are not internationally active, requirement for building up a capital conservation buffer during periods of stress, the need for keeping the RBI capital adequacy norms at 1 per cent higher than Basel III norms, the efficacy of the framework for PCA for banks in restoring banks to health, the need for high-risk weights for credit to micro, small and medium enterprises (MSMEs), and enhancing opportunities for rectifying and restructuring MSMEs’ loan accounts.