The board of directors of the Reserve Bank of India on Monday decided that an expert panel set up jointly by the government and the central bank will examine the economic capital framework to decide on matters related to the RBI’s surplus reserves. The directors also decided that the RBI’s Board for Financial Supervision will examine matters related to banks put under the Prompt Corrective Action.

The decisions were taken during a crucial nine-hour meeting of the board of directors in Mumbai, the RBI said. A restructuring scheme for stressed micro, small and medium enterprises was also discussed during the meeting.

Eleven state-owned banks have been placed under the Prompt Corrective Action framework, which means they have restrictions on their lending because of deterioration in their asset quality. The Centre has been concerned about the lending restrictions. The economic capital framework, too, has been a cause of disagreement. The framework governs the terms of transfer of the RBI’s surplus reserves to the government. A news report had earlier claimed that the government had sought Rs 3.6 lakh crore from the central bank’s reserves – though Economic Affairs Secretary Subhash Chandra Garg dismissed the claim.

The government also reportedly wants the central bank to allow banks to lend more to non-banking financial companies and the micro, small and medium enterprises sector.

Here’s the statement released by the RBI after the meeting:

The Reserve Bank of India’s Central Board met today in Mumbai and discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs [micro, small and medium enterprises], bank health under Prompt Corrective Action framework and the Economic Capital Framework of RBI. 

The Board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI. 

The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to Rs 250 million, subject to such conditions as are necessary for ensuring financial stability. 

The Board, while deciding to retain the CRAR [Capital to Risky Asset Ratio] at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer, by one year, i.e., up to March 31, 2020. With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision of RBI.

The meeting was held amid a tussle between the government and the RBI, with speculation that the Centre has proposed a change in rules that will enable it to supervise the central bank better. Three directors on the RBI board – S Gurumurthy, Subhash Chandra Garg and Rajiv Kumar – were appointed by the government. On November 15, Gurumurthy, co-convener of the Rashtriya Swayamsevak Sangh’s economic wing, the Swadeshi Jagaran Manch, said that the standoff between the RBI and the Centre was “not a happy thing”.

The tussle between the central bank and the government became public when remarks made by RBI Deputy Governor Viral Acharya said during a speech on October 26 that governments that do not respect a central bank’s independence sooner or later incur the wrath of financial markets. Three days later, Reuters reported that the Centre was upset with the RBI for publicly talking about the rift.

There was speculation that the Centre may invoke – or may already have invoked, according to some reports – the Section 7 of the RBI Act, which empowers it to issue instructions to the bank. The government responded to the reports, not making any comment on the claim itself, but with the statement that the central bank’s autonomy is essential. Some reports suggested that RBI Governor Urjit Patel may resign if the government forces his hand.

In an interview to CNBC-TV18 earlier this month, former Governor Raghuram Rajan said the rift can be resolved only if both sides respect each other’s intent and autonomy.