RBI needs to further relax IRAC norms to protect financial system

The Reserve Bank needs to further relax the income recognition and asset classification (IRAC) norms to protect the economy and the financial sector currently facing the heat of the coronavirus outbreak, said an SBI report. The deadly coronavirus or COVID-19 has infected more than 20 lakh persons around the globe and so far taken lives of over 1.47 lakh people. The decision of various countries to opt for lockdown to prevent the spread of deadly virus has severely impacted the economy.

Amid such a situation, an IRAC will take a heavy toll not only on the economy but also on requirement of core capital by the banking system, said the SBI Ecowrap.

Although the decision of the RBI to exclude the accounts availing moratorium from the 90-day NPA norm will provide a breather to banks as well as customers, given the working capital challenges it is advisable for the RBI now to relook at the 90-day norm, the report said.

Observing that once an account is classified as NPA, the borrower won't be able to raise funds from any other lender, the report said.

In the current circumstances the only way to save the economy and the financial system seems to be a relaxation of the IRAC norms i.e. extending the 90-day schedule to 180 days.

This relaxation, it added, should be given along with a well laid out calendar of returning to the current norm of 90 days in the next two years by which time, hopefully, the current pandemic crisis would have subsided completely.

Commenting on the Reserve Bank's decision to reduced the reverse repo rate by 25 bps to 3.75 per cent while keeping the repo rate unchanged, the SBI Ecowrap said, the move has widened the LAF corridor to 90 bps.

"The widening of the LAF corridor and a surplus liquidity regime effectively implies reverse repo rate could be the effective policy rate," the report said.

Meanwhile, Avinash Bagdi, Head of Finance, Covestro India, said "the bold" steps taken by the RBI to ensure smooth functioning of banks and financial institutions will help the country to prevent the economic slowdown curve from steepening.

"The announcement of excluding moratorium period from 90-day NPA period will prove to be a relaxation of asset classification norms. In view of tightening the financial conditions, the decision to provide special refinance facilities of Rs 50,000 crore to NHB, SIDBI and NABARD is commendable," he added.

While thanking RBI for announcing slew of measures including liquidity injection of Rs 50,000 crore to tackle Covid-19 crisis, the Apparel Export Promotion Council (AEPC) also requested the central bank to protect the exporters from penalty on forward covers due to exchange rate fluctuations.

“It is requested that the charges for exchange rate fluctuations and cancellations are waived for the period for which export orders have been cancelled due to COVID-19,” AEPC Chairman A Sakthivel said in a letter to the RBI Governor.

Earlier in the day, the Reserve Bank of India on cut the reverse repo rate and announced a slew of measures including re-finance window of Rs 50,000 crore and targetted long term repo auction of similar amount to deal with the impact of the COVID-19 pandemic.

Governor Shaktikanta Das also assured that RBI will use all instruments at its disposal to deal with the challenges posed by the outbreak of the novel coronavirus, depending on evolving situations.

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