RBI board meet: Members discuss liquidity issues; silent on PCA

The RBI board did not discuss issues pertaining to the Prompt Corrective Action framework or the surplus reserves of the central bank

Liquidity issues in the economy was one of the key discussions points at the Reserve Bank of India (RBI)'s board meeting on December 14.

The meeting, which was chaired by newly appointed RBI Governor Shaktikanta Das, was centred around the current economic situation, global and domestic challenges, matters relating to liquidity and credit delivery to the economy.

"The Board deliberated on the governance framework of the Reserve Bank and it was decided that the matter required further examination," said RBI in a statement.

On December 11, RBI said it will infuse Rs 10,000 crore into the market through open market operations (OMOs) on December 13. This was to improve liquidity conditions in the market.

IL&FS debt crisis

The shortage of liquidity in the market was part of the fallout of defaults by infrastructure lender IL&FS and its group entities, which are facing a debt crisis. The IL&FS group had missed several interest payments to corporates since June 2018.

The first signs of trouble in the IL&FS group emerged in June, when it defaulted on inter-corporate deposits and commercial papers (borrowings) worth about Rs 450 crore. Over the next three months, rating agencies downgraded its long-term credit ratings.

This had a spill-over effect on other non-banking financial companies (NBFCs). Borrowing rates in the debt market had climbed to a four-year high in October 2018, which increased NBFCs' cost of funds. Mutual funds too became more cautious about buying their debt instruments.

RBI silent on PCA framework discussions

Surprisingly, the RBI's statement did not include anything on the Prompt Corrective Action (PCA) framework, which was a discussion point at its nine-hour marathon board meeting on November 19.

A total of 11 public-sector banks are under the PCA framework of the RBI. Those under PCA face several restrictions, including restrictions on non-core activities and lending.

During the tenure of former RBI Governor Urjit Patel, the government and the central bank were unable to arrive at a consensus on relaxing these PCA rules for loss-making banks. RBI was asked to make the rules flexible so as to ensure easier availability of credit for these banks.

No discussion on RBI's surplus reserves

One of the most serious differences between the government and the RBI was about the central bank's holding of reserves. The government wanted RBI to transfer a higher amount of capital as dividend so that it could be used for activities like recapitalisation of ailing banks.

In today's meeting, there was no mention of the Economic Capital Framework (ECF) of the RBI, for which a committee was to be set up in accordance with a decision taken at the central bank's November 19 board meeting.

At the November meeting, the board had decided to constitute an expert committee to examine the ECF, the membership and terms of reference, which will be jointly determined by the government and the RBI.

Other issues discussed in the board meeting

The board also discussed issues pertaining to currency management and financial literacy. The draft report on Trend and Progress of Banking in India (2017-18) was also discussed.

It is likely that the next meeting of the RBI board will be in January 2019.

Source:  https://www . moneycontrol.com/news/business/economy/rbi-board-meet-members-discuss-liquidity-issues-silent-on-pca-3291781.html 

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