Govt versus RBI: Pressure on RBI to ease credit to small firms, relax lending norms

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Govt versus RBI

While the trouble between the government and the Reserve Bank of India has been simmering for a while, RBI Deputy Governor Viral Acharya’s public outburst on Friday followed a persistent demand by some recently-appointed non-official directors to the central bank’s board for MSME (Micro, Small and Medium Enterprises) forbearance and relaxation of the RBI’s prompt corrective action (PCA) framework for some banks to ensure better credit flow to stressed sectors.

According to sources, S Gurumurthy of Swadeshi Jagran Manch, who is now a part-time, non-official director on RBI’s Central Board, has been unbending on his demand for MSME forbearance and increased credit flow, particularly at a time when growth is seemingly slowing down.

MSME forbearance would ease the criterion for banks in recognising loans to this segment as non-performing assets. Some other directors nominated by the government, including former cooperative banker Satish Marathe, former Indian Audit and Accounts Service officer Revathy Iyer and Director General, RIS, Sachin Chaturvedi, have also differed with RBI’s full-time directors on these issues.

The RBI website shows that the Central Board currently has 18 members, including five full-time directors from within the central bank — Governor Urjit Patel and four deputy governors. When contacted, Gurumurthy told The Indian Express that the “issue is being discussed by the Central Board” and hence he would not comment. Gurumurthy and Marathe were appointed to the board on August 8, when Piyush Goyal was handling the finance and corporate affairs portfolios in the absence of Arun Jaitley.

In fact, RBI data on deployment of gross bank credit till August-end this year shows that credit to industry has grown by a meagre 1.9% year-on-year, and, within this broad category, credit to micro and small enterprises has increased 2.6%, and to medium enterprises by 6.5%. In contrast, credit to the services sector has posted a phenomenal 26.7% growth. The MSME segment accounts for just about 6% of the gross bank credit.

The RBI Central Board is sharply divided on the issue, with some other part-time, non-official directors backing the full-time directors from within RBI. The RBI is of the view that the demand for MSME forbearance and pulling banks out of the PCA framework is in conflict with RBI’s position to create an environment of “sustainable banking” and “staying the course” on lending restrictions till banks improve their finances.

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