Government likely to push RBI to ease lending restrictions for banks under PCA

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The Government of India is likely to push the Reserve Bank of India (RBI) to ease the lending restrictions imposed on certain public sector banks under the prompt corrective action (PCA). A report by Economic Times quotes some anonymous people who have knowledge of the matter. The government may also ask RBI to review some of the rules governing its function. This issue is likely to be raised at the next board meeting.

PCA

The RBI has imposed its PCA on some of the weak banks that have a high ratio of non-performing assets. As of now, there are about 11 banks in the PCA list and these banks cannot lend money to major customers without the approval from RBI. It is believed that the government may ask the RBI to remove some lenders from the list if they are consistent in recovering the debt.

Considering the ongoing rift between the RBI and the Finance Ministry, this new proposal on PCA might cause further tension during the upcoming meeting on December 14. Both sides have already come to a truce during the most recently concluded meeting. The issues between both sides concern surplus funds transfer, liquidity for shadow-banking, and ease of lending rules.

Rather than penalizing weak banks for their non-performing assets, the government is likely to urge the RBI to come up with a plan to prevent bad loans from accumulating in the first plan. The board members are likely to raise this issue seeking a prompt preventive plan that has stricter supervisory controls on banks.

RBI has about 18 board members who traditionally serve as an advisory body. Major issues like deciding on interest rates and supervision of banks are left to the Governor and his team members. In recent days, the board is asking for more powers to have a bigger say in various RBI affairs.

Source: Economic Times

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