New Delhi: The Reserve Bank of India’s monetary policy committee (MPC) on Thursday afternoon decided to leave key policy rates unchanged even as the economy faces a sharp downturn due to the lockdown imposed to contain the novel coronavirus pandemic.
Over the last few months, the central bank panel had effected two emergency rate cuts in a bid to bolster economic sentiments. On Thursday, however, the MPC decided to keep the benchmark repo rate unchanged at 4%, which is at its lowest level in two decades, and reverse repo rate at 3.35%.
More importantly, in view of the pandemic, the RBI also announced plans to allow lenders to provide a restructuring facility on some loans that were standard as on March 1, 2020.
An expert committee will be set up under K.V. Kamath to work out modalities and look into resolution plans of eligible borrowers.
The decisions were announced after the 24th bimonthly meeting of the RBI’s six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das.
Repo rate is the rate at which the RBI lends to commercial banks, and reverse repo is the rate at which it borrows from them.
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The RBI had last revised its policy rate on May 22, in an off-policy cycle, to perk up demand by cutting interest rate to a historic low. Das said the MPC voted to keep interest rate unchanged and continue with its accommodative stance to support growth.
“Global economic activity has remained fragile. A surge in COVID-19 cases has subdued early signs of revival, said Das, adding: “Economic activity had started to recover, but a surge in infections has forced the imposition of lockdowns.”
Supply chain disruptions were persisting and inflationary pressures were evident across segments, he said.
In its outlook for the rest of the year, the MPC noted that inflation was expected to remain elevated in the second quarter of 2020-21 and ease thereafter in the second half of the year. On the economic growth front, Governor Das said, without putting any number to it, that India’s real gross domestic product would contract in the first half of FY21 as well as full financial year.
Among other key measures announced by the RBI, additional special liquidity facility of Rs 5,000 crore each will be provided to the National Bank for Agriculture and Rural Development (Nabard) and the National Housing Bank (NHB). The RBI would also amend priority-sector lending guidelines to remove regional disparity – a higher weight would be accorded to districts with lower credit flows. The start-up sector has been included as a priority sector and the cap on credit to the renewable energy sector has been raised. And, to ease some stress on households in the wake up of the coronavirus pandemic, the cap on loans against gold has been enhanced from 75% to 90% of the value.
Amid fast-changing macroeconomic environment and a deteriorating outlook for growth, the MPC has had to hold off-cycle meetings in March and May this year. The MPC has cumulatively cut the repo rate by 115 basis points in these two meetings, taking the total policy rate reduction since February 2019 to 250 basis points.
A shopkeeper swipes a customer’s debit card with the logo of RuPay at an electronics goods store in Kolkata, October 31, 2018. Photo: REUTERS/Rupak De Chowdhuri
According to a research report by State Bank of India, the country’s largest lender, banks have cut rates on fresh loans by 72 basis points, the fastest transmission ever recorded, during this period. SBI itself has cut by an equivalent 115 basis points on its repo-linked retail loan portfolio.
In the run-up to the announcement, experts had mostly been divided over the possibility of a rate cut, with many ruling it out saying a call on restructuring of loans and discontinuation of moratorium was more likely. Finance Minister Nirmala Sitharaman had said that focus was now on restructuring. “The focus is on restructuring. The finance ministry is actively engaged with the RBI on this. In principle, the idea that there may be a restructuring required is well taken,” she had said last week.
The six-month moratorium given by the RBI ends on August 31. Rating agency Icra had said in a report on Wednesday that an extension of moratorium and one-time restructuring of loan could pose challenges to lenders and also impact their financial stability if the quantum was large.
A Business Standard poll of 10 economists and bond market participants had seemed geared in favour of a pause in rate cut. Of the 10, three had expected a cut, while seven had said there would be a pause. All the three bond market participants polled had expected a pause.
Also read: RBI Acts By Cutting Rates Again, but Will this be Enough to Kickstart Lending?
Personal loan help
Under the newly announced scheme, a resolution plan for personal loans may be invoked till December 31 and will be implemented within 90 days thereafter. Borrowers whose accounts are classified standard, but not in default for more than 30 days as of March 31, will be eligible for restructuring.
According to the RBI guidelines, lenders may reschedule payments of the borrower, convert the interest accrued or interest that will accrue into another credit facility. Furthermore, the plan may entail granting of moratorium to borrowers, based on assessment of income streams of the borrower, subject to a maximum of two years, and the loan tenor can be modified accordingly. The moratorium period, if granted, will come into force immediately upon implementation of the resolution plan.
A shopkeeper arranges face masks at his shop in Jabalpur, June 2, 2020. Photo: PTI
According to Krishnan Sitaraman, senior director, CRISIL Ratings, “Retail borrowers have faced stress because of the pandemic, resulting in their debt servicing ability being significantly impacted. The moratorium gave them some relief in terms of repayment, but the restructuring will give them long-term relief.”
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However, he added that the economic challenges will result in asset quality issues manifesting itself. The retail segment is not insulated from it, as borrowers face cash-flow issues. While retail has been considered a safe segment, bad debts in retail will go up proportionately more than the other segments. In other segments, non-performing assets (NPAs) are already high. The RBI measures will help to cushion that impact.
Anil Gupta, vice-president and sector head–financial sector ratings, ICRA, said, “The debt restructuring for personal loans will be a breather for the retail segment under stress due to job/business losses and salary cuts. It will allow retail borrowers to recoup the losses. Two years of the moratorium is a substantial time within which we can expect the economy to recover somewhat.”
The RBI’s financial stability report had revealed as much as 80% of individual borrowers of public sector banks and 42% of private sector banks had opted for the moratorium as of April 30. Since then, banks have revealed their books under moratorium have shrunk, but borrowers under the retail segment opting for the moratorium are relatively higher than the borrowers in the corporate segment, indicating cash-flow issues for individual borrowers.
“The personal loan resolution framework will cover a bulk of existing loans sanctioned to individual borrowers with respectable repayment track record. It will help them repay their loans according to the changed repayment capacity caused due to the COVID-19 pandemic,” said Naveen Kukreja, chief executive officer (CEO) and co-founder, PaisaBazaar.
A man wearing face mask walks past a shop displaying colourful face masks at Gandhi Nagar textile-cloth wholesale market, on May 28. Photo: PTI
It will also provide major relief to lenders and reduce financial stability risks to the overall economy, as most lenders were expecting a major spike in their NPAs after the end of the loan moratorium facility, added Kukreja.
Lenders are expected to keep provisions higher than held under IRAC norms, or 10% of the renegotiated debt exposure of the lending institution post implementation of resolution plan. Half of the provisions may be written back upon the borrower paying at least 20% of the residual debt without slipping into NPA post implementation of the plan, and the remaining half may be written back upon the borrower paying another 10% of the residual debt without slipping into NPA subsequently.
Not only borrowers, lenders with significant retail exposure are expected to benefit from this move.
According to ICICI Direct Research, addressing hardship faced by retail borrowers amid the pandemic is a positive for lenders with substantial retail exposure, including HDFC Bank, Kotak Mahindra Bank, Bajaj Finance, and State Bank of India.
Furthermore, the RBI decided to increase the permissible loan-to-value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes, from 75% to 90%. This relaxation will be available till March 31, 2021; beyond that, it will be again back to 75%.
Experts said the increase in LTV for gold loans is a surprising move. Since it is for a short period of time, lenders who wish to take risks may opt for it by giving shorter duration of loans — say six months. This has been done to provide liquidity to retail borrowers to help them tide over the crises.
A labourer carries vegetable oil packets on a tricycle at a wholesale market in Kolkata, India. Photo: REUTERS/Rupak De Chowdhuri/File
Zarin Daruwala, CEO, Standard Chartered India, said household finances will get a boost, with the increase in the loan to value of gold loans.
Kukreja said, “A higher LTV ratio will not only help borrowers avail of higher loan amounts, it may also provide relief to existing gold loan borrowers in case of any steep correction in gold prices in the near term.”
According to C.V.R. Rajendran, managing director and CEO, CSB Bank, “This step by the RBI will place more money in the hands of borrowers. While this move will help broaden the gold loan market, we will also witness increased competition in this segment. Lenders will need to ensure their valuation and risk management processes remain tight and robust.”
(With inputs from Reuters and by arrangement with Business Standard)
