New Delhi: The government and Reserve Bank of India (RBI) seem to be veering around to reach an agreeable solution particularly with respect of relaxation of the Prompt Corrective Action (PCA) framework and easing of lending norms for the MSME sector ahead of the RBI board meeting on November 19, sources said.

If not in this board meeting, sources said, the issue of relaxation of PCA framework which the finance ministry has been pitching for would be reached in the next few weeks. As a result of relaxation, some banks may come out of the PCA framework by the end of the current fiscal. Of the 21 state-owned banks, 11 are under the PCA framework. 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). The RBI is also likely to agree to easing of lending norms for the MSME sector including strict rating criteria to improve credit flow to this sector, sources said. Besides, the central bank is expected to consider special dispensation for micro, small and medium enterprises (MSME) sector and non-banking financial companies (NBFCs) which have been facing liquidity issues.

The government feels that the MSME sector which employs about 12 crore people plays a critical role in the economy, and the sector hit by demonetisation and implementation of Goods and Services Tax (GST) needs support. However, the central bank has been averse to government demand for special dispensations for MSME and NBFC sectors as it consider them vulnerable. Last week, Finance Minister Arun Jaitley said there is a need to minimise NPAs in order to maintain the strength of the banking system and enable it to help the economy grow.

It is only a strong banking system that will be able to improve credit in those sectors which really need credit, the Finance Minister had said, adding, “The MSME sector needs credit, several other players in the market need credit. NBFCs today need credit because a large part of lending is done by them.” There are reports of growing tensions between the RBI and the government, with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI Governor.

RBI Deputy Governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be “potentially catastrophic” for the economy.

Bank recapitalization post-RBI review: Government

NEW DELHI: The government is waiting for the RBI’s annual review of public sector banks’ books to ascertain their capital requirement, before deciding the next tranche of recapitalisation, a senior finance ministry official said. “We are waiting for the central bank’s report on the asset quality of banks before deciding on the quantum of recapitalisation for each individual bank,” the official said.

“The report by the central bank on the asset quality will help public sector banks to get a better grasp of their provisioning requirements. This in turn will help the government in ascertaining the capital needs of individual banks,” he said. Earlier, sources had said the government will decide bank-wise quantum of recapitalisation after studying the financial results of Jul-Sep. In September, at the annual review meeting of state-owned banks, chaired by Finance Minister Arun Jaitley, banks had requested for upfront capital infusion from the government. “I have assured them that we will immediately look at this subject because we are as keen as them,” Jaitley had said after the review meeting.

The finance ministry has been examining the feasibility of expediting its capital infusion for the current financial year in a bid to help the struggling public sector banks, which have been put under the RBI’s prompt corrective action framework. So far in the current financial year, the government has infused a total of RS 19,850 crore in seven state-owned banks, including Punjab National Bank, Corporation Bank, Central Bank of India, and Allahabad Bank, by issuing recapitalisation bonds. The Budget for 2018-19 had projected issuance of bonds worth Rs 65,000 crore to infuse funds into state-owned banks, which leaves issuances worth Rs 45,150 crore by March.