RBI governor Shaktikanta Das says the regulatory response has to be dynamic, proactive and balanced during the COVID-19 crisis.
While many believed it would be a growth-inflation conundrum for the Reserve Bank of India's monetary policy committee (MPC), the central bank chose inflation as its priority and kept the key lending rates unchanged at 4 percent on August 6.
Repo rate is the rate at which the RBI lends funds to commercial banks. In 2020, the central bank had already cut the rate by 115 basis points.
RBI Governor Shaktikanta Das said the regulatory response has to be dynamic, proactive and balanced during the COVID-19 crisis, adding the central bank was mindful of its responsibility to maintain financial stability.
Here are 10 highlights of the RBI's presser:
The MPC kept repo rates unchanged at 4 percent, reverse repo rate unchanged at 3.35 percent and maintained accommodative stance. MPC voted unanimously in favour of the status quo.
RBI said the space for further monetary policy action is available but advisable to be judicious.
Loan restructuring for MSME
The RBI recognised the need for continued support to MSMEs’ meaningful restructuring.
"It has been decided that, in respect of MSME borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may restructure the debt under the existing framework, provided the borrower’s account was classified as standard with the lender as on March 1, 2020. This restructuring shall be implemented by March 31, 2021," said RBI.
Inflation in focus
Inflation stays high, said RBI governor. "Domestic food inflation has remained elevated across economies ever since the coronavirus outbreak," said RBI governor Shaktikanta Das.
However, he added that agriculture sector prospects have improved with the good monsoons and rise in Kharif sowing area.
MPC projected retail inflation to remain elevated in Q2. However, it added that a more favourable food inflation outlook might emerge on good farm produce.
Sombre growth outlook
RBI said that the real GDP growth of the country may remain in a negative zone in the first half and overall FY21.
The output of core industries in June contracted for the fourth successive month though with a considerable moderation.
The Reserve Bank’s business assessment index (BAI) for Q1FY21 hit its lowest mark in the survey’s history. The manufacturing PMI remained in contraction, shrinking further to 46.0 in July from 47.2 in the preceding month.
However, high-frequency indicators of services sector activity for May-June indicate signs of a modest resumption of economic activity, especially in rural areas, although at levels lower than a year ago.
Resolution framework for COVID-19-related stress
The RBI announced providing a window under the Prudential Framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without a change in ownership, and personal loans, while classifying such exposures as Standard subject to specified conditions.
"Such conditions are considered necessary to ensure that the facility of this resolution window is available only to the COVID-19 related stressed assets. Besides, the crucial aspect of maintaining financial stability has also been suitably factored in," RBI said.
The framework shall not be available for exposures to financial sector entities as well as central and state governments, local government bodies (e.g. municipal corporations) and anybody corporate established by an Act of Parliament or State Legislature, said RBI.
Only those borrower accounts shall be eligible for resolution under this framework that was classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.
The accounts should continue to remain standard till the date of invocation. The resolution plan may be invoked anytime till December 31, 2020, and shall have to be implemented within 180 days from the date of invocation, RBI said.
Lenders shall have to keep additional provisions of 10 percent on the post-resolution debt.
The Reserve Bank is constituting an Expert Committee under the chairmanship of K.V. Kamath which shall make recommendations to the RBI on the required financial parameters.
Increase in permissible loans against gold Ornaments and jewellery
RBI allowed an increase in the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75 percent to 90 percent. This relaxation shall be available until March 31, 2021.
Additional liquidity facility for NHB, NABARD
RBI said it will provide an additional standing liquidity facility (ASLF) of Rs 5,000 crore to NHB – over and above Rs 10,000 crore already provided – for supporting housing finance companies (HFCs). The facility will be for a period of one year and will be charged at the RBI’s repo rate.
Besides, RBI will provide an additional special liquidity facility (ASLF) of Rs 5,000 crore to NABARD for a period of one year at the RBI’s policy repo rate for refinancing NBFC-MFIs and other smaller NBFCs of asset size of Rs 500 crore and less to support agriculture and allied activities and the rural non-farm sector.
Creation of innovation hub
Areas such as cybersecurity, data analytics, delivery platforms, payments services, etc., remain at the forefront when we think of innovation in the financial sector, RBI said.
To promote innovation across the financial sector by leveraging on technology and create an environment that would facilitate and foster innovation, RBI will set up an Innovation Hub in India.
The Innovation Hub will act as a centre for ideation and incubation of new capabilities which can be leveraged to create innovative and viable financial products and/or services to help achieve the wider objectives of deepening financial inclusion, efficient banking services, business continuity in times of emergency, strengthening consumer protection, etc, said RBI.
The Innovation Hub will support, promote and hand-hold cross-thinking spanning regulatory remits and national boundaries.
Online dispute resolution for digital payments
RBI underscored that as the number of digital transactions rises significantly, there is a concomitant increase in the number of disputes and grievances.
It said that the central bank will require Payment System Operators (PSOs) to introduce Online Dispute Resolution (ODR) Systems in a phased manner."To begin with, authorised PSOs shall be required to implement ODR systems for failed transactions in their respective Payment Systems. Based on the experience gained, ODR arrangements will be extended
to other types of disputes and grievances," RBI said.
RBI will issue instructions in this regard later today.Scheme of offline retail payments using cards and mobile devices
The RBI proposed to allow a pilot scheme for small value payments in off-line mode with built-in features for safeguarding the interest of users, liability protection, etc.
The central bank said the instructions in this regard will be issued shortly."Based on experience gained, detailed guidelines for the roll-out of the scheme will be announced in due course," RBI said.