Centre, RBI try to bury hatchet

New Delhi: After a public showdown, the government and the Reserve Bank of India (RBI) are reported to be working to reach an agreeable solution particularly for the relaxation of the Prompt Corrective Action (PCA) framework and easing of lending norms for the MSME sector ahead of the RBI board meeting on November 19.

According to sources, even if no decision on relaxation of PCA framework which the finance ministry has been pushing  is taken during the board meeting, steps are likely to taken in the next few weeks.

As a consensus, sources said some of the banks are likely to be allowed to come out of the PCA framework by the end of the current fiscal. The PCA framework kicks in when banks breach any of the three key regulatory trigger-points — namely capital to risk weighted assets ratio, Net non-performing assets (NPA) and return on assets (RoA).

Of the 21 state-owned banks, 11 are under the PCA framework. These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra.

As part of negotiations, the RBI is also likely to agree to easing of lending norms for the MSME sector including strict rating criteria to improve credit flow to this sector, the sources said.

The apex bank is expected to consider special dispensation for the MSME sector and NBFCs which have been facing liquidity issues.

The finance ministry feels that the MSME sector which employs about 12 crore people plays a critical role in the economy, and the sector hit by demonetisation and implementation of Goods and Services Tax (GST) needs support.

In fact, industry chamber CII on Wednesday said that MSMEs are facing additional challenges in accessing credit due to the recent liquidity crunch in the economy impacting their working capital and term loan needs.

“MSMEs at present have been facing issues arising out of delayed decisions from banks on granting access to credit, additional collateral requirements, demand for personal guarantees, additional charges and conditionalities on bank guarantees,” said CII. It said that delayed payments and higher interest rates have also contributed to the financial stress faced by this sector.

The dialogue between the Centre and the central bank commenced after reported disagreement between them after the finance ministry initiated discussion under the never-used-before Section 7 of the RBI Act, which empowers the government to issue directions to the RBI governor.

The relations between the government and the central bank nosedived after RBI deputy governor Viral Acharya warned that undermining a central bank’s independence could be “potentially catastrophic”, hinting that the Mint Road is pushing back hard against government pressure to relax its policies and reduce its powers.