Gurumurthy Backs Government In Seeking Easier Banking Rules

S Gurumurthy, member of the Reserve Bank of India's central board and a known supporter of the ruling Bharatiya Janata Party, backed the government's position of seeking easier banking rules to ensure credit flow to the economy.

Ahead of the crucial RBI board meeting on Nov. 19, Gurumurthy said the government has a problem with the revised prompt corrective action norms that were introduced in 2017. These included new set of triggers to invoke corrective action in weak banks like net bad loans crossing 6 percent. His view is in line with the government's that the RBI should follow practices of other central banks that do not include asset-quality based triggers for intervention by any central bank.

The comments come at a time when the government and the central bank are at loggerheads on issues ranging from easier PCA framework to a policy governing reserves held by the RBI. The differences became public after Deputy Governor Viral Acharya, in a speech, warned against eroding the independence of the central bank. The disputes between the two, debated publicly, are likely to come up at the central board meeting on Nov. 19.

Agreeing that the standoff between the RBI and the government is “not a happy thing”, Gurumurthy, however, said banks were forced by the RBI to make provisions for non-performing assets at one go, which led to the stress in the banking system.

He also said Indian banks have to maintain capital to risk weighted assets ratio of 9 percent, 1 percentage point higher than Basel III norms. “We are doing more than what Basel wants and so the banks have less money to lend.”

Supporting the government's push for easy flow of credit to micro, small and medium enterprises, Gurumurthy said small businesses have been “robbed” of credit. The MSME sector—which is driving the lifeline of India, provides 90 percent of employment and 50 percent of GDP of India—is starved of money, he said.

Once this capital is provided to the sector, consumption and growth will pick up. But the government, he said, is not asking the central bank to transfer its reserves but to devise a policy for the reserves it must hold on its balance sheet.

In a demand conveyed earlier this year, the government suggested that the RBI is sitting on excess capital of Rs 3.6 lakh crore. This amount would be freed if the central bank were to reduce its equity to asset ratio to 14 percent—median of the ratio of global central banks—from 24 percent as on June 2018. The government thinks, BloombergQuint had earlier reported, that the RBI has been very conservative in its assessment of capital buffers to meet unforeseen risks.

Watch S Gurumurthy's full speech on the Indian economy here.