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RBI's loan restructuring a Hobson's choice amid current banking & economic situation: Sujan Hajra of Anand Rathi

The biggest announcement of the monetary policy was the resolution plan for loans (both corporate and retail), which were otherwise healthy but got stressed due to the pandemic.

August 10, 2020 / 06:22 PM IST

Sujan Hajra

The rate pause was expected but does not mean the end of the easing cycle. We expect 50 bps cut in repo rate in FY21, more if real GDP shrinks more-than-expected. Loan restructuring scheme is more like a fait accompli with some short-term relief but uncertain future implications. Lowering of loan-to-value (LTV) for gold loans was a surprise.

No rate change, negative growth, expectation of lower inflation: As expected, the Monetary Policy Committee (MPC) kept all the policy rates unchanged during the August 2020 meeting. The stance of the monetary policy remained accommodative. The decisions on policy rates and policy stance were unanimous. Without specifying a number, the MPC indicated that real growth is likely to remain negative during H1 FY21 as well as for the full year. The MPC expects inflation to remain elevated during Q2 FY21. While the Committee recognises certain upside risks to inflation, it is felt that inflation would subside in H2 FY21.

50 bps rate cut in FY21 likely: The MPC clearly stated that supporting economic revival is the current primary objective of the monetary policy. The Committee also categorically stated that even under the current situation (when retail inflation is above 6 percent), space for monetary policy action exists. This seems to suggest that if the expected softening of inflation gets realised in H2 FY21, the scope for lowering of policy rate would get widened. Our base case is that the RBI would cut the policy rate by another 50 bps in FY21. If real growth falters further, deeper rate cuts cannot be ruled out.

Better transmission of rate cut: The monetary policy statement did not elaborate much on the most serious issue at hand - continued deceleration in bank credit growth. Instead, detailed mentions were made about how the combination of drastic rate cut and large liquidity infusion has got transmitted in the credit and debt market. There is not much elaboration on the high time premiums in the debt market as well.


Higher LTV for gold loans: As a temporary measure, the RBI has increased the regulatory ceiling on loan to value (LTV) ratio for gold loans from 75 percent to 90 percent during FY21. With international gold prices above $2,000 per troy ounce and Indian gold prices above Rs 5,300 per gram, this would provide larger loan amounts for borrowing against gold. At the same time, this would enhance credit risk for banks as any correction of gold prices from the huge recent run-up would impact the collateral value.

One-time restructuring: The biggest announcement of the monetary policy was the resolution plan for loans (both corporate and retail), which were otherwise healthy but got stressed due to the pandemic. The RBI has laid down certain prudential norms for such loan restructuring in the accompanying document of the monetary policy. An expert committee, headed by K V Kamath, would recommend further details regarding the scheme. As mentioned in our monetary policy preview, loan restructuring is a Hobson's choice at this juncture keeping the state of both the banking sector and the economy in mind. Yet, the implications over the medium-term remain uncertain.

Likely improvement in earnings, but possible de-rating of banks: The latest Financial Stability Report suggested likely jump in GNPA from 8.5 percent in March 2020 to 12.7 percent in March 2021 under the base case scenario. Within one year, banks need to provide 25 percent for secured loans turning NPA. The RBI has indicated that banks have to make provision worth 10 percent post-resolution debt. Assuming NPA remains unchanged at 8.5 percent, banks would need to make lower provisioning in FY21 if the quantum of restructured loan is less than ((12.7-8.5)*25/10=) 10.5 percent of the outstanding loan. Loan restructuring quantum below this would improve FY21 earnings of the banking system. Yet, the apprehension of a sizable part of restructured loans eventually turning NPA may result in de-rating of banks.

The author is Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
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first published: Aug 7, 2020 11:05 am
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