RBI did the right thing today, not falling prey to market pressures. And once again, the RBI Governor has proved that there is a lot more that the central bank can do to ensure financial stability without depending merely on rate cuts. This was a very mature and deeply thought-out policy and we will see the benefits panning out from the second half of FY21. The policy is not just focused on the impact of the pandemic but without making it into a circus has also looked at much ahead, when the pandemic settles and balance comes back in.
The rates remained status quo and that means RBI is indeed paying attention to CPI. The stance, which we all pay attention to now, remained accommodative. The RBI expects headline inflation to remain elevated.
The market was happy that RBI did bring in restructuring and major responsibility of this has been given to KV Kamath, who is expected to make recommendations and draw up the principles for resolution. The policy did spell out that MSME borrowers will be eligible for restructuring their debt under the existing framework provided their accounts were standard as of March 1, 2020.
Highlights of the one-time resolution framework for exposures other than personal loans are as under:
1: Only those borrower accounts shall be eligible for resolution under this framework which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.
2: Accounts should continue to remain standard till the date of invocation.
3: Resolution plan may be invoked anytime till December 31, 2020 and shall have to be implemented within 180 days from the date of invocation.
4: Lenders shall have to keep additional provisions of 10 per cent on the post-resolution debt.
5: Lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.
6: With respect to personal loans, a separate framework is being prescribed. The resolution plan for personal loans under this framework may be invoked till December 31, 2020 and shall be implemented within 90 days thereafter.
It’s also good that RBI did not extend moratorium. And another good news for smaller households is that loans against gold enhanced to 90% of the value from current 75%.
RBI Governor laid out its path to maintain stability in the financial sector and plans to do this by improving liquidity support for financial markets, easing financial measures to mitigate pandemic impact, deepen digital payment systems, ensure customer safety in cheque payments and facilitate innovations across financial sector.
The policy rates remain at:
Policy Repo Rate
Reverse Repo Rate
Marginal Standing Facility Rate
A few highlights of the policy:
a: Rs 10,000 crore special additional liquidity facility to be provided to NHB, NABARD - for supporting housing finance companies. The facility will be for a period of one year and will be charged at the RBI’s repo rate.
b: To introduce an optional facility to provide banks more flexibility/discretion to manage their day end cash reserve ratio (CRR) balances
c: To provide a window under the Prudential Framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as Standard subject to specified conditions.
d: Constituting an expert committee headed by veteran banker KV Kamath for resolution plans- this has to come in pretty quick, given that we have around 60 days more before Q2 ends.
e: Allows lenders to provide window to restructure loans of corporate, individual borrowers to ease COVID-19 impact
f: MSME borrowers will be eligible for restructuring their debt under the existing framework provided their accounts were standard as of March 1, 2020
g: Restructuring will have to be implemented by March 31, 2021
h: Loans against gold enhanced to 90% of the value from current 75% - this relaxation shall be available till March 31, 2021.
i: Priority Sector Lending (PSL) guidelines reviewed - higher weight will be assigned for incremental priority sector credit in the identified districts where credit flow is comparatively lower, a lower weight would be assigned to incremental priority sector credit in identified districts where the credit flow is comparatively higher; broadening the scope of PSL to include start-ups; increasing the limits for renewable energy, including solar power and compressed bio gas plants; and, increasing the targets for lending to ‘Small and Marginal Farmers’ and ‘Weaker Sections’.
j: Customer safety in cheque payments and reduce instances of fraud - introduce a mechanism of Positive Pay for all cheques of value Rs.50,000 wherein cheques will be processed for 10 payment by the drawee bank based on information passed on by its customer at the time of issuance of cheque.
k: To promote innovation across the financial sector by leveraging on technology and create an environment which would facilitate and foster innovation, Reserve Bank will set up an Innovation Hub in India.
l: Headline inflation which was 5.8% in March, placed at 6.1% in the provisional estimates for June 2020.
m: Inflationary pressures evident across all subgroups.
n: Headline inflation likely to ease in H2FY21, aided by favourable base effects.
p: Real GDP expected to contract in H1FY21 and real GDP growth for full year of FY 2020-21 estimated to be in negative as well.
q: Abundant liquidity led to lowest borrowing cost in decade - NBFC commercial papers have softened to 3.8% and for non-NBFCs, rates down to 3.4%, as at July 31.
r: Introduction of automated mechanism in e-Kuber system