The RBI board will soon set up a high-level committee for examining the Economic Capital Framework (ECF) to determine the appropriate levels of reserve the central bank should hold, official sources said Tuesday. After a day-long meeting on Monday, the central board of the RBI decided to set up an expert committee to look into the ECF.
It was also agreed that the membership and terms of reference of the panel will be jointly determined by the government and the Reserve Bank of India.
Currently, the capital base of the RBI is Rs 9.69 lakh crore, and independent director and Swadeshi ideologue S Gurumurthy and the finance ministry have been wanting it to be lowered in line with global practices.
The sources further said that guidelines for restructuring of loans for the medium, small and micro enterprises (MSME) will also be released shortly with a view to help the cash-starved sector.
A decision in this regard too was taken at the Board meeting held in Mumbai yesterday.
The central board headed by RBI Governor Urjit Patel, which met amid the on-going tussle between the Finance Ministry and the central bank over various issues, also discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, and bank health under Prompt Corrective Action (PCA) framework.
Earlier this month, Gurumurthy had made a case for calibration of its massive Rs 9.6 lakh crore reserves, saying no central bank in the world maintains such high levels of surplus.
He had also said the capital adequacy ratio prescribed in India is 1 per cent higher than the global Basel norms.
However, the board decided to retain the capital adequacy ratio or CRAR at 9 per cent against 8 per cent prescribed by Basel III norms.
However, it agreed to extend the transition period for implementing the last tranche of 0.625 per cent under the Capital Conservation Buffer (CCB), by one year, that is up to March 31, 2020.
The CCB currently stands at 1.875 per cent and remaining 0.625 per cent was to be met by March 2019, as per the deadline fixed by the RBI.
According to experts, the reduction of 1 per cent capital adequacy ratio will free up about Rs 70,000 crore in the system.
With regard to banks under Prompt Corrective Action (PCA), it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of the RBI.
Of the 21 state-owned banks, 11 are under the PCA framework, which imposes lending and other restrictions on weak lenders.
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.
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).
Globally, PCA kicks in only when banks slip on a single parameter of capital adequacy ratio, and the government is in favour of this practice being adopted for the domestic banking sector as well.