Finance Minister Arun Jaitley said on Sunday that the simple reduction of bad debts could ensure adequate credit flow for small businesses and NBFCs in difficulty, but also help solve market liquidity problems, signaling a loosening its links with the Reserve Bank.
It is interesting to note that the Minister of Finance's latest statement is in fact in line with the RBI's determination on this issue, which has always insisted that action be taken on non-performing assets (NPAs).
The apex bank has also shown itself opposed to the government's demand for special exemptions for SMEs, NBFCs and the energy sector, in order to stimulate growth before the April turbulence. to may.
"To maintain the strength of our banking system and help it grow the economy, we need to minimize our NPAs," said Jaitley at the 100th day of the founding of the Union Bank of India, led by the state, Sunday night. video link.
"Only a strong banking system can improve credit in the sectors that really need it. The MSME sector (micro, small and medium enterprises) needs credit, several other market players need credit. NBFCs are in need of credit today because a lot of their loans are made to them, "he added.
It should be noted that by the end of March, the system-wide bad debt ratio had reached 12%, while for some government-managed lenders, such as IDBI Bank, taken over by LIC, it held close to 12%. 28% of its capital. loans as unused assets from the June quarter.
After a sharp rise in bad debts, which accelerated after the ban on banknotes and the rapid implementation of the GST, the RBI met in September 2016 up to 11 banks managed by the government. State under the prompt prompt corrective action plan for NPAs.
This led to a tightening of credit in the economy, with these banks collectively controlling one-fifth of credit and system-level deposits, and small units were the most affected by the crisis.
The banking system needs to be strengthened to lend to the NBFCs, which will ensure that "market liquidity is maintained," the minister said.
NBFCs controlled over 13% of the system-wide credit market in March 2018.
"We need to target and target our policies; the entire system needs to focus on the direction in which we are improving the lending capacity of our banks and the available liquidity in our markets, "said Jaitley.
According to some information, S. Gurumurthy, unofficial director of the board of directors of the RBI appointed by the government, had requested the abstention of the MSMEs as well as an increased flow of credits in d & # 39; other critical sectors.
In addition, other reports indicated that the government wanted the RBI to open a special refinancing window for NBFCs, mutual funds and housing finance companies that have been under stress since the lender's failures IL & FS.
Jaitley, however, did not discuss other contentious issues such as the transfer of excess capital from the RBI to the government or the dilution of the Rapid Corrective Action Framework (BCP) for certain sectors, such as the power partly related to the NPAs. or the reduction of bank capital reserves.
According to sources, the three letters that the government sent to the RBI on October 10, according to Section 7 of the RBI Act, which had never been used before, indicated up to the date of the release. to a dozen requests. Other demands include a more active council by reducing the powers of the Governing Board of the Central Council, which is populated by the governor, his four deputies and certain general managers.
Jaitley has limited his remarks on the NPAs and the role that they can play to ensure the circulation of credits.
"The future of our economy and its growth depend on this lending capacity," he said, adding that "the immediate goal" should be to strengthen the banking system, whose burden is greater Rs. 12.5 million in NPAs of global banking assets.
Jaitley said that several options have been exercised, few results have been achieved and the current "experiments" are now leading to results.
"The early harvest" of IBC also gives positive results, he said.
The minister reiterated his comments on the excessive number of loans between 2008 and 2014 as the reason for the current high NPAs and called their concealment of error "fatal", but did not directly mention the RBI this time.
In anticipation of a FSDC meeting last month, Jaitley had accused the RBI of "turning a blind eye" when banks were lending indiscriminately in 2008-2014.
On Sunday, Jaitley also thanked the Monetary Policy Committee (MPC) for the excellent work done by the latter and hoped that it will continue to improve it in the future.
Relations between the RBI and the Ministry of Finance deteriorated last month, after the North Block launched consultations under Article 7 of the RBI law, which has never been used.
According to sources, the government sent three letters to the RBI with nearly a dozen requests that were answered within a week.
The election-focused government wants RBI to help troubled non-bank lenders obtain liquidity support, liberalize CPA standards and take other growth-enhancing measures, while the RBI would adopt a conservative vision and avoid any bad precedents.
The capital surplus collected by the RBI has also become a contentious issue, a report reporting that the government provided one-third of its Rs 3.6 billion.
State Secretary for Economic Affairs, S Garg, denied the amount but said that a discussion was underway on an "appropriate economic capital framework" for the RBI.
The central bank publicly expressed reservations over various issues in a speech delivered by deputy governor Viral Acharya on Oct. 26, warning investors to be angry if the RBI's autonomy was compromised.
After section 7 action reports were submitted, the government had attempted to ease tensions by stating that autonomy was "essential" and an accepted governance requirement.
However, Garg was also mocked by Acharya's "angry markets" remark, highlighting the improved financial markets since the speech.
The RBI's board of directors is due to meet again on November 19, while many expected a stormy meeting.