India Is Said to Push RBI to Lift Lending Curb on Some Banks

(Bloomberg) -- The Indian government will push its central bank to ease lending restrictions for some weak banks and review rules governing its functioning at a board meeting next month, people with knowledge of the matter said.

The members, including government nominees, will press for some of the weak banks to be removed from the so-called prompt corrective action list, particularly those ones that have been consistent in recovering outstanding debt, the people said, asking not to be identified as the plan is not public. There are 11 state-run lenders on the list, which curbs their ability to lend.

The proposals suggest another potentially tense board meeting on Dec. 14 amid an ongoing dispute between the Finance Ministry and the central bank over a number of issues, including the transfer of surplus funds, easing of lending rules and providing liquidity to the shadow-banking sector. The two sides signaled a truce at the most recent board meeting earlier this month.

Read More: Why India’s Government and Central Bank Are Feuding

The Reserve Bank of India will also have to come with a plan to prevent banks accumulating bad loans rather than just penalizing weak lenders with restrictions on lending, the people said. Board members may ask the RBI to come up with a prompt preventive plan as well, apart from seeking greater supervisory control on issues including the monetary policy transmission, they said.

Finance ministry spokesman D.S. Malik didn’t respond to calls to his mobile phone. A spokesman for the central bank didn’t immediately respond to an e-mail seeking comment.

Governance Structure

Murmurs of dissent have resurfaced after Economic Affairs Secretary Subhash Chandra Garg, who is a government nominee on the RBI board, said on Nov. 25 there are plans to discuss changes to the central bank’s governance structure at the next meeting.

Traditionally, the RBI’s 18-member board has served as an advisory body to the central bank, leaving crucial decisions, including banking supervision and setting interest rates, to Governor Urjit Patel and his team. 

Recently, the board has been pushing for a bigger say in the RBI’s affairs. The government has prepared a road map that includes setting up panels to oversee functions including financial stability, monetary-policy transmission and foreign-exchange management.

Governor Patel appeared before a parliamentary panel on Tuesday to testify on the demonetization move but refused to answer lawmakers’ questions on central bank’s autonomy and the tiff with the government, a member told reporters in New Delhi. He said the economic fundamentals are strong and bad loan situation is improving, the member who attended the meeting said, asking not to be identified as the matter was not public.

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