The gist of RBI Meet on 19 Nov

RBI vs. Government
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Last updated on May 15th, 2021 at 09:19 pm

The gist of RBI Meet on 19 Nov

The much-anticipated meeting of the RBI board to discuss the conflicting views of some RBI decisions took place yesterday on 19th November 18. The matters discussed include:

Basel Regulatory Capital Framework:

Basel norms or Basel framework talk about the minimum capital requirements and manages the health of a bank.  Capital Adequacy ratios (CAR) are defined in Basel norms. Maintaining an acceptable CAR protects bank depositors and the financial system as a whole. It is also known as the Capital to Risk (Weighted) Assets Ratio (CRAR) and is expressed as a percentage of a bank’s risk-weighted credit exposures. The gist of RBI Meet on 19 Nov

The Board decided to retain the CRAR at 9%. The Board also decided to extend the implementation of the last tranche of 0.625% under the Capital Conservation Buffer (CCB) by one year up to March 31, 2020. Capital Conservation Buffer (CCB) is a buffer of capital built-up by banks that is used in a stressed period. It is a mandatory buffer and helps to maintain minimum capital requirements.

Restructuring scheme for stressed MSMEs

Many stressed MSME borrowers contribute to significant credit facilities. The Board while discussing the matter advised considering a scheme of the restructuring of such stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 25 cr. However, this restructuring is subject to such conditions as are necessary for ensuring financial stability.

Currently, the SME sector is one of the challenged sectors in the country. The restructuring of loans is positive news for SMEs. However, as per past experience, such restructuring of large loans can lead to the creation of huge NPAs. Hence, utmost care should be taken while restructuring the loans.

Bank health under Prompt Corrective Action (PCA) framework

PCA framework and related rules were one of the conflict areas between the government and RBI. (Click here to know more about PCA framework and conflict between RBI and Government). It was decided that the matter regarding the banks under PCA will be examined by the Board for Financial Supervision (BFS) of RBI. It will be interesting to see what BFS comes up with; as the PCA framework was one of the conflicting matters where the news of government invoking Sec 7 came.

The Economic Capital Framework (ECF) of RBI

Another important matter of rift between the RBI and Government was the surplus distribution of the RBI. The Government wanted the surplus distribution of Rs. 3.6 lakh crores. However, as per RBI the existing economic capital framework, which governs the RBI’s capital requirements and terms for the transfer of its reserves to the government, does not allow.

The government is of the opinion that the current framework is based on a very “conservative” assessment of risk by the central bank and has been adopted unilaterally without the presence of government officials. It was decided to form an expert committee to examine ECF. The members of the Committee and terms of reference will be jointly determined by the Government of India and the RBI.


Some very important matters of rift got addressed and got some fair resolution or compromise by RBI

The meeting yesterday was a successful attempt to ease the tension between the RBI and Government and led to some positive talks. The rift was a negative sentiment for FII flows in India and the market as a whole.

Liquidity and governance aspects are likely to be discussed at the next board meeting on December 14.

The formation and meetings of the expert committee and BSF are important and should be done at the earliest.


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CA Janhavi Phadnis


Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.

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