By: Tavaga Research
Reserve Bank Of India kept the repo rate unchanged at 4% citing a rise in inflation and a projected negative GDP growth for FY21. It maintained an accommodative stance for as long as necessary, to address growth challenges posed by a grim economic outlook, amidst growing concerns for the second-wave effect of Covid-19. There has already been a reduction of 115 basis points in the repo rate since the year’s first bi monthly MPC meeting in February.
The below trajectory shows the trajectory of Repo rate over the last year:
Why an unchanged repo rate?
Firstly the transmission of the rate cut has improved to a 72 bps cut on newly issued loans , which is the fastest transmission recorded till date. Despite this , credit growth has declined . Monetary policy has thus been acknowledged as being constrained in its abilities to drive growth in the current situation .Latest data indicates retail inflation touching 6.1% in June 2020; which goes to show that demand shock hasn’t been compensated enough to outdo the supply shock induced in the economy.
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CPI inflation has mostly exceeded the upper band of the 2%-6% target set by RBI; partly due to increased fuel prices and gold value . This sticky inflation situation has averted any further rate cuts as of now .
Banks still struggling
Despite RBI’s boost given to the financial system in form of billions of dollars ; loan growth has been lagging on the backs of a slump in the economy slated to contract by 4.4% this year. The Gross NPA ratio is also expected to grow to around 12.5% by the year’s end.
Also markets have set cautious eyes on RBI’s yield curve control and bond repurchase activities for liquidity assurance in banking and NBFC sectors
Despite an accommodative stance , RBI has also announced various measures outside its traditional purview to stimulate structural revival in sectors and ease liquidity concerns in the wake of growing volume of distressed assets
- Allowing for one -time restructuring of the Corporate Loans: RBI has allowed lenders for a one-time restructuring of loans relaxing the need to classify them as NPAs . A committee headed by K.V. Kamath has been formed to suggest the roadmap for implementation of the restructuring plan under the new resolution framework under sufficient mandated safeguards . One of the most welcome features of this move is the extension of the loan restructuring facilities to corporate and individuals .MSME borrowers with distressed assets are also allowed debt-restructuring ,has their accounts being classified as standard as on March 2020.
Lending banks and NBFCs are to come up with an implementation of the resolution plan under the ambit of board approved polices .
The Loan restructuring plan includes the following:
- A part of the Debt can be converted into equity or other marketable, non-convertible debt securities issued by the borrower given that the terms of the debt held on the books of the lending banks are similar to the securities issued by the borrowers, post implementation of the resolution plan
- Even if the corporate /individual borrowers are unable to renegotiate their existing debt ; additional credit facilities will be sanctioned under the proposed plan to ease the stress on the borrowers
The one time restructuring of stressed accounts on the books of the lenders is a step in the right direction lauded by leading bankers and economists ;citing that the Covid -19 impact on the distressed financial sector needs urgent remedial measures .
The New Resolution Framework would guarantee that companies with no cash flows for the past 6 months won’t be penalized
2. Special Liquidity Scheme of Rs.10,000 Cores for NABARD & NHB: An equal split of Rs.5000 Crores has been provisioned for the National Housing Board & The National Bank for Agriculture and Rural Development ,under a special liquidity facility to address the growing concerns in the real estate sector .The move is expected to help loan companies and financiers invested in real estate. The presently liquidity strapped sector mostly due to the over-reliance of retail borrowers on loan moratoriums has crippled the lenders’ abilities to fulfill their repayment liabilities
The Rs.5000 Crores of ASF provided to the NHB is expected to ease the liquidity constraints in the sector and streamline financing activities through Housing finance companies .The real estate sector is expected to pick up on stalled projects and lead to fruition its development plans ;in the process , creating more jobs and spurring growth in related sectors with promise of an economic revival
3. Start-ups to now come under priority sector lending: RBI announced that its going to broaden the ambit of priority sector lending by including start-ups . It also announced widening the borrowing limits for renewable energy sector as well as renewed increased targets which are to be met by the lending sectors for lending to “small farmers” and the weaker sections .Priority sector lending ensures easier terms for credit to eligible entities ; and the concerned guidelines were last reviewed by RBI in 2015
The Central Bank also acknowledged the presence of regional disparities in Priority sector lending ; with credit getting concentrated in specific areas of the countries ;mostly owing to the supply chain irregularities .To address the same ,an incentive –based framework has been introduced for banks to persuade them to increase credit presentation. According to the framework ,a higher weight will be assigned for incremental priority sector lending in districts with lower credit flows than those districts where credit flow has been identified to be higher .
4. Increased Loan-to –value ratio of 90% under revised gold loans guidelines : Appreciating the recent sky-rocketing trajectory in Gold prices which breached the Rs.53,000 mark in both the commodities as well as the bullion market ;RBI has increased the LTV of bank sanctioned loans against gold pledge to 90 % ,up from the previous 75% .This will be in place till March 31 ,2021. The increased LTV is expected to benefit the households and small businesses looking for credit for non –agricultural purposes
The current market penetration of Gold loans at 5.5% of the total yellow metal holdings , is expected to increase, with banks such as HDFC and Federal Bank looking to expand their credit portfolios backed by gold as collateral. Also the urgent need for capital for MSMEs and rural households means that ,RBI’s recent move will ease their woes , as well as help broadening the gold loan market ,which is expected to reach Rs.4.62 Lakh Crores by FY21-22
Apart from the above broad measures , RBI also signaled a push towards digital payments ,putting more emphasis on digital transactions and other innovations such as video KYCs for speeding up last mile delivery of much needed credit.RBI Governor Shaktikanta Das also announced plans for digital resolution mechanisms and a scheme of offload retail payments. The Offline digital payment system has been announced taking into consideration the long term goal of increase financial inclusion and promoting digital payments in the rural areas. To address the connectivity issues which play an obstacle in realization of the planned efforts ; an innovation hub has also been proposed which would act as a platform for conglomerating innovative and viable products and capabilities to achieve the objectives of financial inclusion
All in all , the 4th MPC meeting of the year was well received with NSE and BSE indices gaining around 1% each post the policy announcement
Given that inflation is on an upward trajectory, there will be a room for an expert-opined 25 bps cut in the next half as the supply side disruptions cease to worry. But addressing the relevant structural issues in the economy and mitigating the effect of the pandemic on sectors to alleviate further escalations in the inflation trajectory was something which RBI has on its agenda now.