Liquidity crisis

Centre, RBI see eye to eye in ‘public interest’

After a high-pitched spat over last week, the Reserve Bank of India (RBI) and the government on Wednesday seemed to agree to continue discussions to resolve their recent disagreements — in “public interest”. Speculation was rife on RBI Governor Urjit Patel’s imminent resignation on Wednesday morning. But by afternoon, he had called a board meeting on November 19 to continue discussions. The finance ministry also issued a statement:

The central bank and the government have to be guided by public interest and the requirements of the Indian economy.


“The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this.  The government and the central bank had disagreed on several issues such as dividend transfer, capital adequacy norms, and liquidity needs of non-banking financial companies (NBFCs). The RBI for now is focused on providing adequate liquidity to the system.

In October, it announced Rs 360 billion of open market operations (OMO) to buy bonds from the secondary market. In November, it plans to buy Rs 400 billion worth of secondary market bonds. The first of such purchases, totalling Rs 120 billion, will happen on Thursday.

The market has taken comfort from the RBI’s focus on providing liquidity. The 10-year bond yield closed at 7.85 per cent, marginally up from its previous close of 7.83 per cent. The rupee closed at 73.95 a dollar, up from its day’s low of 74.15 a dollar on reports of invocation of Section 7 of the RBI Act.

In the first fortnight of October, the department of economic affairs sent three letters to the RBI Governor referring to Section 7 to hold discussions on various regulatory policies. The government gave suggestions and sought the views of Patel on a host of issues, including dividend transfer, stressed power assets, easing prompt corrective action norms (PCA), forbearances for micro, small and medium enterprises, foreign portfolio investors, and NBFC liquidity, among others.

The RBI replied to the government’s letter within a given timeframe as required in the statute, sources said. Though the government’s letters mentioned Section 7, it did not invoke Section 7(1) that says the Centre may issue directions to the RBI after holding consultation with its governor “in public interest.

Will the government say whether such letters have been written and whether the letters specifically refer to Section 7 of the RBI Act?

The finance ministry said in its statement that it places its “assessment” on issues and suggests possible solutions and will continue to do so.

“Extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators. The Government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated. The issue of the government threatening to invoke Section 7 of RBI Act cannot be separated from the current tensions between the North Block and the central bank, which culminated in a full-blown argument between the Economic Affairs Secretary Subhash Garg and Governor Urjit Patel in the last meeting of the RBI’s board of directors.

Subject to these directions, this section also talks of superintendence and direction by the central board in the affairs of the RBI. Both the nominees of the government in the central board do not have voting power in the board. The previous board meeting, held last week, went on for about nine hours and was adjourned as no decision was taken on a number of issues flagged by the government’s nominees Garg and Financial Services Secretary Rajiv Kumar.

[frontpage_news widget=”879″ name=”Certicom – A Group of Chartered Accountants – Articles”]

Foreign ecommerce companies

Foreign e-commerce companies rush to register for GST in all states

Amazon, Google, Apple and other foreign companies that operate in the electronic commerce space will have to register for the tax on goods and services (GST) in all states in the next 10 to 12 days.

The government has said that e-commerce companies must collect the tax at the source as of October 1. To comply with taxes levied at the source (TCS), e-commerce players must register in each state. This provision applies to both foreign players and Indian consumers.

A clarification to this effect was given at a meeting between e-commerce players and the Central Board of Indirect Taxes and Customs held on Tuesday, according to a person deprived of the deliberations of the meeting.

However, the provision mentions the rate as up to 1%, the rate, for now, will be 0.5% for each state and central GST.

For e-commerce companies, this implies a deduction of 1% of payments to their suppliers for goods sold on their platforms that must be deposited with the government. Tax experts said the government should provide a centralized registry for foreign e-commerce players.

There is no exemption from registration for foreign e-commerce companies

[frontpage_news widget=”879″ name=”Certicom – A Group of Chartered Accountants – Articles”]

PCA Rules

RBI may Relax PCA Rules for State Banks

The Reserve Bank of India may consider relaxing its prompt corrective action (PCA) framework for loss-making banks, marking a significant shift in its stance. Banks under PCA face several limitations, including on lending, until they are nursed back to health.
Credit disbursement has suffered as a number of banks are under PCA. However, the government expects some lenders to come out of the PCA framework on their own.
RBI may Relax PCA Rules for State Banks
At present, 15+ banks are under the PCA framework. The lowest common equity Tier I ratio as prescribed by RBI stands at 5.5% against 4.5% under Basel III norms. Bank credit was up 12.5% on September 28 from a year ago. The RBI stoutly defended the PCA framework in the past.
Any relaxation in the PCA imposed on weak banks should be avoided.
Imposition of PCA can thus be seen as first, stabilising the banks at risk, and then, undertaking the deeper bank reforms needed for the long-term viability of the business model of these banks. The government is also hopeful that the recoveries made by banks under the bankruptcy process will help them bring down their losses and provide more capital for lending.
Since banks have written off most of their bad loans, any recovery would add to their bottom line and boost capital. Lenders expect to recover almost 86% of the  49,000 crore loan in the case of Essar Steel. ArcelorMittal has agreed to pay 50,000 crores, including an 8,000-crore the capital infusion, to acquire the firm.
Bankers also had certain expectations, which the government would consider. – Arun Jaitley
Banks had sought relaxation because they would find it difficult to come out of the PCA unless their income increased. . They have requested for the provisioning norms, and they have also requested for the way lending starts and risk-weighted assets also assigned, so as to allow them a little headroom for growing.

[frontpage_news widget=”879″ name=”Certicom – A Group of Chartered Accountants – Articles”]