RBI board agrees to improve liquidity after marathon meet as government pressure mounts

The Modi government has been pressuring the RBI to reduce capital ratios for banks to speed up loans to small businesses.

MUMBAI: After a day-long meeting in Mumbai, the board of the Reserve Bank of India (RBI) on Monday agreed to ease liquidity for the financial sector and increase credit to small businesses.

The central board of the apex bank decided to constitute an expert committee to examine the Economic Capital Framework (ECF), the membership and terms of reference of which will be jointly determined by the Government of India and the RBI.

The board also advised that the RBI should consider a scheme for the restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs. 250 million, subject to such conditions as are necessary for ensuring financial stability, reported ANI.

The board, while deciding to retain the CRAR at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year (up to March 31, 2020).

The move comes in response to alleged pressure from the Narendra Modi government which faces a general election next year and is concerned that low farm prices and the difficulties which small businesses face in borrowing, may hurt its prospects with voters. 

Some more contentious issues were kicked down the road to be discussed by newly formed committees, the sources said.

The BJP government has been pressuring the RBI to reduce capital ratios for banks to speed up loans to small businesses, a key vote bank for PM Modi. 

There are five key state elections in the next few weeks and a general election in the year 2019.

"The meeting happened in a very cordial environment. Most of the issues were resolved in an amicable manner," a board member, who attended the meeting, was quoted by Reuters as saying.

"A panel will be formed to work out a framework to determine the reserves requirements of the RBI and transfer surplus funds to the government," the board member said. 

A litany of demands from top Finance Ministry officials prompted warnings from RBI Deputy Governor Viral Acharya last month that undermining central bank independence could be "catastrophic," triggering a public feud between the bank and the government.