Government, RBI can collide with NBFC liquidity

NEW DELHI | MUMBAI: Sparks are destined to fly at the board meeting of the Reserve Bank of India on Monday, as the government and regulator could clash with the need for a special liquidity window for non-bank financial corporations (NBFC), although the two are likely to take a step back from the edge of other issues, said three people familiar with the issue.

Concerned about the NBFCs that have frozen loans due to fears of a liquidity crisis, the government is determined to break the impasse that is causing a credit crunch for micro, small and medium-sized enterprises (MSME), which I work for millions of people.

"Home sales are almost deadlocked," said one of them. "Firstly, bank credit has been denied, and now the NBFCs have also stopped." The 18-member council chaired by Governor Urjit Patel will meet in Mumbai to discuss a number of issues, including the current liquidity position, the loosening of lending rules for banks under the Reserve The timely corrective action of the bank and the transfer of excess reserves to the government.

Many of these problems were not resolved in the previous meeting on October 24th, when the central bank said it had been inexorable on its stand.

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Relations between the government and the RBI have deteriorated in recent months, with the Center citing Section 7 of the RBI in a series of communications with the regulator. The section, which has never been used before, allows the government to provide guidance to the RBI in matters of public interest.

It is known that the central bank informally informed the government, citing statements by the State Bank of India and the HDFC Bank, that there is no problem of liquidity or financial crisis. But the Center believes that the regulator has a fuzzy macro view of the situation and is unaware of the terrestrial realities.

It is likely that the RBI argues that so far no default has occurred despite the market panic and strong speculation, which justifies the status quo. Furthermore, actions such as a special window will transmit the message that there is something seriously wrong, which, instead of helping the economy, could lead to the opposite result.

Finance Minister Arun Jaitley made it clear that policy makers should not attempt quick solutions to stimulate growth, but also said that the lack of liquidity should not stifle economic expansion.

"If we have to improve on this (growth), we need a certain level of credit flow with regard to entrepreneurs … see that liquidity is maintained," he told the Economic Times Awards for the corporate excellence of Saturday.

Jaitley said the country is still paying the price of the shortcuts taken after the 2008 financial crisis.

"Therefore (policy) will have to be done in a way to restore banks, to restore discipline regarding the banking system," Jaitley said. "At the same time, we are not limited to strangling growth by throttling credit and liquidity in the market – and this is the key issue – any other issue can be a diversion, but if there is not an appropriate answer, I think we will look for the wrong solutions for a problem where simpler solutions are available. "

The government's point of view was endorsed by the Moody & # 39; s international rating agency.

"India also faces a potentially strong slowdown in credit availability, as non-bank financial institutions are facing a possible credit crunch," said the agency in a report of 15 November.

Of the 18 members on the board, five are from the RBI, including four vice governors. The remaining are named and include Undersecretary for Economic Affairs Subhash Chandra Garg and Tata Sons President N Chandrasekaran.

Among the focal points in the dispute between the two was an RBI circular in February that strengthened the default rules and an October speech by deputy governor Viral Acharya who warned about the dangers of undermining the & # 39; regulatory autonomy. The RBI also resisted the state's request to obtain a higher payment from the central bank's reserves, apart from measures that the government had sought to increase credit growth in order to stimulate economic activity and generate work.

In the last few days, however, both sides seem to have eased their criticisms on the other, pointing out that Monday's arguments will not precipitate a crisis.

On the issue of reservations, the board of directors may decide to set up a committee under the responsibility of an expert to study the problem and recommend the formula to be followed instead of discretionary approaches.

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