India central bank board agrees to support small firms, ease capital norms

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The board of India's central bank advised it to act to support small businesses and give banks more time to step up capital norms, following weeks of pressure from Prime Minister Narendra Modi's government to spur lending ahead of elections.

After a nine-hour board meeting on Monday, the Reserve Bank of India (RBI) said its board also decided to form an expert committee to look into whether RBI reserves are adequate, in light of a push from New Delhi for access to surplus reserves built up by the central bank.

“Overall it appears some of the government's concerns have been addressed within the parameters of the RBI's existing regulatory framework,” said A Prasanna, chief economist at ICICI Securities Primary Dealership Ltd.

The Modi government is concerned that low crop prices and difficulties small businesses face in borrowing may dent its prospects in numerous state elections over coming weeks, and a national election due by May next year.

Top government officials and one independent director have pressed the RBI to ease lending and capital rules for banks, provide more liquidity to the shadow banking sector, support lending to small businesses and let the government use more of the RBI's surplus reserves to boost the economy.

Unhappy about such pressure, last month RBI Deputy Governor Viral Acharya warned that undermining central bank independence could be “catastrophic.” That triggered a public spat between the two sides and tension in the run-up to Monday's board meet.

The RBI board comprises representatives of the RBI, the government and some independent directors nominated by the government. Typically RBI board meetings are staid affairs, but markets were closely focused on Monday's meeting in light of the public spat.

However the meeting itself was cordial, two sources who attended it told Reuters. “The meeting happened in a very cordial environment. Most of the issues were resolved in an amicable manner,” one board member told Reuters.

“A panel will be formed to work out a framework to determine the reserves requirements of the RBI, and transfer surplus funds to the government,” the board member added.

Source(s): Reuters