Sparks are set to fly at the Reserve Bank of India board meeting on Monday as the government and the regulator may clash over necessity for a special liquidity window for non-banking finance companies (NBFCs), although the two are likely to step back from the brink on other issues, said three people familiar with the matter.
Worried about NBFCs having frozen lending due to fears of a liquidity crunch, the government is determined to break the logjam that’s causing a credit squeeze for micro, small and medium enterprises (MSMEs), which employ millions, said the people.
“Housing sales have almost stalled,” said one of them. “First, bank credit was denied, and now NBFCs have also stopped.” The 18-member board headed by governor Urjit Patel will meet in Mumbai to debate numerous issues, including the current liquidity position, easing of lending norms for banks under the Reserve Bank’s prompt corrective action, and the transfer of excess reserves to the government.
Many of these issues were unresolved at the previous meeting on October 24 when the central bank was said to have been unrelenting on its stand.
Relations between the government and the RBI have deteriorated over the past few months, with the Centre having cited Section 7 of the RBI Act in a series of communications with the regulator. The section, which hasn’t been used before, allows the government to give directions to the RBI in matters of public interest.
The central bank is known to have informally communicated to the government, citing statements from the State Bank of India and HDFC Bank NSE 1.48 %, that there is no liquidity problem or financial crisis. But the Centre believes the regulator holds a fuzzy macro view of the situation and isn’t aware of ground realities.
The RBI is likely to argue that no default has taken place so far despite the market panic and loud speculation, which justifies the status quo. Furthermore, actions such as a special window would convey the message that there is something seriously wrong, which, instead of helping the economy, could result in the opposite outcome.
Finance minister Arun Jaitley has made clear that policy makers should not attempt quick fixes to boost growth, but also said that the shortage of liquidity should not stifle economic expansion.
“If we have to improve on this (growth), we need a certain level of credit flow as far as entrepreneurs are concerned… see that liquidity is maintained,” he said at the Economic Times Awards for Corporate Excellence on Saturday.
Jaitley said the country is still paying the price for shortcuts taken after the 2008 financial crisis.
“Therefore it (policy) will have to be done in a manner to restore banks, to restore the discipline as far as the banking system is concerned,’’ Jaitley had said. “At the same time, we don’t end up throttling growth by throttling credit and liquidity in the market — and that is the key issue. Any other issue can be a diversion but unless an adequate answer comes, I think we will be looking for the wrong solutions for a problem where easier solutions are available.’’
The government’s view has been endorsed by international rating agency Moody’s.
“India also faces a potential sharp slowdown in credit availability as non-bank financial institutions face a possible credit squeeze,” the agency said in a November 15 report.
Of the 18 members on the board, five are from the RBI, including four deputy governors. The remaining are nominated and include economic affairs secretary Subhash Chandra Garg and Tata Sons chairman N Chandrasekaran.
Among the flashpoints in the dispute between the two was an RBI circular in February that tightened default norms and an October speech by deputy governor Viral Acharya that warned about the dangers of undermining regulatory autonomy. The RBI also resisted the state’s request for a higher payout from the central bank’s reserves, apart from measures that the government had sought to increase credit growth in order to boost economic activity and generate jobs.
Over the past few days, however, both sides appear to have toned down their criticism of each other, signalling that arguments at Monday’s meeting won’t precipitate a crisis.
On the issue of reserves, the board may decide to constitute a committee under an expert to study the issue and recommend the formula to be followed instead of discretionary approaches.