Covid-19: In fight against economic slowdown, RBI introduces new measures

RBI tries to discourage banks from sitting on their liquidity, makes it mandatory to lend to small and medium NBFCs money raised from liquidity window

The Reserve Bank of India (RBI) on Friday once again stepped in to protect financial stability and arrest an economic meltdown, even as the central government is still silent on the need for a comprehensive economic package.
 

In a streamed address to the media, RBI Governor Shaktikanta Das announced a series of measures to “keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable”.
 

The RBI lowered the reverse repo rate by 25 basis points to 3.75 per cent, thus discouraging banks from keeping their surplus funds with it.
 

It ensured liquidity for small non-banking financial companies (NBFCs), and asked banks to lend at least half the money earmarked to be borrowed from the liquidity window to them.

It opened a refinance window for all-India financial Institutions. It can be further used to finance micro and small companies as well as housing finance companies.
 

It told banks not to bother about dividend payment at least till September, reduced their liquidity coverage ratio (LCR), protected real-estate companies from being tagged “defaulter” for one more year, allowed banks to extend moratorium benefits to all loans without naming anyone “defaulter”, and increased the states’ borrowing limit from the central bank by 60 per cent so that they did not crowd the bond market.

Experts said these measures were adequate in addressing the current pain, but could not be a long-term solution in the absence of a supporting move by the government. Also, this may not be the last such announcement by the RBI, according to them.

“The RBI will monitor the evolving situation continuously and use all its instruments to address the daunting challenges posed by the pandemic,” Das said. He also said as inflation eased and came down below 4 per cent by the second half of 2020-21, more space would open up for rate cuts to address the intensification of risks to growth and financial stability brought on by Covid-19.
 

“This space needs to be used effectively and in time,” he said. After the reverse repo cut, for which the RBI doesn’t need to consult the monetary policy committee, the rate is now at 3.75 per cent.
 

This does not mean banks will start lending in earnest, according to experts.
 

“The reason why banks are not lending to NBFCs is a trust deficit on asset quality, not liquidity. And that cannot be addressed by moves on liquidity and interest rates,” said Ananth Narayan, associate professor at the SP Jain Institute of Management and Research.

“The government will have to do a few things — maybe launch a bad bank or look at doing a TARP (troubled assets relief programme) kind of operations (purchasing assets directly from stressed firms). At the least, they can offer credit guarantees for some of the stress. But they have not taken any measure as yet,” Narayan said, adding that government’s fiscal deficit would widen anyway and so there was no harm if the RBI bought bonds from the government or from the secondary market to help the government borrow more.
 

The RBI introduced an additional Rs 50,000 crore under its targeted long-term repo operations (TLTRO). At least 10 per cent of the TLTRO money should be invested in securities issued by microfinance institutions (MFIs), 15 per cent in securities issued by NBFCs with an asset size of Rs 500 crore and below; and 25 per cent in securities issued by NBFCs with an asset size between Rs 500 crore and Rs 5,000 crore.

“The measures announced today (Friday) have addressed the immediate concerns of the NBFCs to remain financially solvent while waiting for a stimulus package from the government, which will set the path for a long-term viability of operations,” said Vimal Bhandari, chief executive officer, Arka Fincap. Abizer Diwanji, EY India’s lead of financial services, estimated that while NBFCs would be comfortably placed with the TLTROs, banks should borrow under the facility first.

While banks continue to put close to Rs 7 trillion of their surplus liquidity with the RBI, private-sector banks have been struggling as deposits are shifting away from them.

“With some private banks witnessing deposit outflows, their reliance on inter-bank funding could likely increase in the near term. Such inter-bank funding is included in high run-off while calculating the liquidity coverage ratio (LCR) for the bank.

Relaxation in the LCR will enable banks to meet their regulatory requirements in case their dependence on bulk deposits or inter-bank lines increases,” said Karthik Srinivasan, group head, Financial Sector Ratings, ICRA.

While the RBI governor did not mention a possible NBFC moratorium, he cleared the confusion around it to a large extent.

“It has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e. there would an asset classification standstill for all such accounts from March 1, 2020, to May 31, 2020,” the governor said in his address.
 

NBFCs said banks would be able to extend the moratorium to them without bothering about a default tag, which would mean higher provisioning.

The RBI on March 27 had extended this facility to working capital and retail loans. But NBFCs don’t have a working capital concept, and so banks were hesitant in extending a three-month moratorium to them.

However, the RBI did say that if banks decided to extend the moratorium on any loans, they would have to make an additional provision of 10 per cent, which can be fully reversed in two quarters once the situation normalised.
 

Furthermore, the RBI said it would open a Rs 50,000-crore refinance window for the National Housing Bank (NHB), National Bank for Agricultural and Rural Development (Nabard), and Small Industries Development Board of India (Sidbi).

In a relief to the micro, small and medium enterprises, which stare at being classified as a defaulter due to lack of business in the lockdown period, the RBI said the period for the resolution plan could be extended by 90 days beyond the 180 days’ window the banks were given for coming up with a resolution plan.
 

To help state governments with liquidity, the RBI also increased the ways and means advances (WMAs) by 60 per cent over their March 31 limit. This will give states greater comfort for undertaking containment and mitigation efforts, and plan their market borrowing programmes better, Das said.
 

The bond market welcomed the RBI measures, especially the liquidity comfort to the state governments. The yield on the one-year bond fell 21 basis points (bps), on the three-year bond 20 bps, and on the 10-year bond 7 bps, after the RBI measures.

With contributions from Hamsini Karthik