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Last Updated : Aug 06, 2020 03:32 PM IST | Source: Moneycontrol.com

RBI policy good for banks; one-time loan restructuring & increase in LTV for gold loans strong steps: Experts

Experts feel the status quo on policy rate was on expected lines given the already 115 bps repo rate cut announced in previous two policy meetings and current higher inflation levels.

Sunil Shankar Matkar

The Monetary Policy Committee unanimously decided to keep repo as well as reverse repo rate unchanged in its bi-monthly policy meeting on August 6. Despite no policy rate cut, the MPC maintained an accommodative stance.

The repo rate has been unchanged at 4 percent and the reverse repo rate is at 3.35 percent, while MSF rate and Bank rates were also left unchanged at 4.25 percent.

Experts feel the status quo on policy rate was on expected lines given the 115 bps repo rate cut so far in 2020 and current higher inflation levels.


"Not surprisingly, the RBI's MPC unanimously held status quo on rates. The current level of rates in the system is benign enough to allow for a pause. Cumulative rate cuts since February 2019 were also accompanied by a sharper cut in reverse repo as well as the lowered level of CRR, in previous policy announcements. As the US Federal Reserve kept rates unchanged, it enabled us to retain our rates at current levels, which also helps lure foreign capital. The pause allowed RBI an opportunity to monitor upside risks to food inflation and cost-push pressures from the rise in fuel prices," Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities said.

RBI clearly intimated that further rate cut is largely dependent on inflation levels. India's retail inflation for the month of June weakened to 6.09 percent due to spike in the prices of certain food items, against 5.84 percent in March as April and May were lockdown periods.

RBI expects headline inflation to remain elevated in Q2 FY21 and expects FY21 real GDP growth to remain in negative zone in the 1st half and also in the full financial year. Hence, the central bank expects further monetary policy actions to support the economy.

Also Read: Here are 10 highlights of RBI monetary policy

"We remain watchful for durable reduction in inflation to use space for economic revival. Economic activity in India has started to recover from lows of April and May," the RBI governor said.

"MPCs caution on uncertainty on inflation trajectory suggests that chances of further easing will henceforth remain a function clearly of the evolution of supply-side shocks. We see next few readings still elevated near 6 percent and hence we do not see any rate easing in at least the October meeting. On a positive note the other regulatory and development measures announced today will go a long way in ensuring financial stability," Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank said.

The measures taken by the RBI given the six-month moratorium period due to COVID-19 crisis are positive for banks as there could be a one-time restructuring of loans and for that, the committee will be formed under veteran banker KV Kamath, while an increase in loan to value (LTV) for gold loans is also a significant step by RBI, experts feel.

"More importantly, the RBI Governor addressed liquidity concerns in COVID crisis for housing, MSMEs, the flow of credit in corporate bond markets and facilitating improved platform and system for banks. The policy will be seen as a positive for banking sector since no extension of moratorium, one-time restructuring allowed with strict conditions, a veteran banker in Mr KV Kamath to lead the expert committee and allowing secured loans through gold as collateral with higher LTVs," Ambani said.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers also feels the policy delivers support to a large range of sectors including NBFCs, HFCs, corporate debt market, debt MF, agriculture and backward districts (for priority sector loans).

"Increase in LTV for gold loans is another significant step. While we have to wait for the fine prints on debt restructuring, the step would be beneficial for both banks and borrowers in the near-term. The longer-term implication for banks, however, is less clear," he said.

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With a view to mitigating the impact of COVID-19 on households, the RBI has decided to increase the permissible loan to value ratio (LTV) for gold loans to 90 percent. This relaxation will be available till March 31, 2021.

The Reserve Bank is constituting an Expert Committee which shall make recommendations to the RBI on the required financial parameters, along with the sector-specific benchmark ranges for such parameters, to be factored into resolution plans, said the central bank in its statement, adding the Expert Committee will also undertake a process validation of resolution plans for borrowal accounts above a specified threshold.

To support the MSME sector which has been hit by the COVID-19 pandemic, the RBI has decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. "This restructuring will have to be implemented by March 31, 2021."

The central bank also reviewed its priority sector lending (PSL) guidelines, saying an incentive framework is now being put in place for banks to address the regional disparities in the flow of priority sector credit and PSL status is also being given to start-ups; and the limits for renewable energy, including solar power and compressed bio-gas plants, are being increased.

As per RBI's extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital, as compared to holding the same debt instrument through a Mutual Fund (MF)/Exchange Traded Fund (ETF).

The RBI has decided to harmonise the differential treatment existing currently. This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market, it feels.

The RBI also provided additional special liquidity facility of Rs 10,000 crore at the policy repo rate consisting of Rs 5,000 crore to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs), and Rs 5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity.

"The policy takes cognizance of the economic realities around growth and inflation and has adopted a pragmatic approach to the resolution of important issues," Joseph Thomas, Head of Research at Emkay Wealth Management said.

Experts Take on RBI Policy:

Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities

The MPC’s decision on keeping policy rates unchanged was not unexpected. The efficacy of rate cuts is anyway low in the current juncture and the past rate cuts are still feeding into the system. The MPC was cautious with adequate concerns on the evolution of inflation trajectory while being fully supportive of growth prospects as and when inflation trajectory allows.

We expect the RBI to pause in the near term with possibility of a rate cut (if any) visible from the December policy when inflation starts to fall. Going forward, liquidity measures will be important to watch for as the central and state governments borrow heavily under the revised borrowing plans. More importantly, the RBI allowed for resolution plan under the June 7, 2019 notification of Prudential Framework for Resolution of Stressed Assets along with a separate framework for personal loans too. This will help in alleviating some of the stress that is likely to emerge as well as address some of the most affected sectors. The provisioning norms along with rule-based and time-bound resolution plan will likely ensure that banks are prudent in utilising this window and address genuine stressed cases.

Anagha Deodhar – Economist, ICICI Securities on the RBI Monetary policy

The MPC's decision to keep rates on hold is in line with our expectation. Although the committee delivered large rate cuts since the onset of COVID-19, credit growth has been falling consistently. This shows that the ability of monetary policy in stimulating growth is constrained in the current situation. The MPC’s unanimous decision to pause is an acknowledgement of the same.

However, the RBI took a series of measures outside the purview of MPC to provide support to stressed sectors. Measures such as loan restructuring increased in LTV for gold loans, additional liquidity facilities for NHB and NABARD are expected to have a favourable impact.

Jyoti Roy, DVP- Equity Strategist, Angel Broking

The MPC in its monetary policy meeting voted unanimously to keep the policy repo rate unchanged at 4 percent while maintaining their accommodative stance. Keeping in mind the fragile macroeconomic and financial conditions, the RBI has announced additional policy measures to enhance liquidity support for financial markets, improve the flow of credit and further ease financial stress caused by COVID-19 disruptions. Few of the additional measures announced by the RBI include additional special liquidity facility of Rs 10,000 crore which will be provided at the policy repo rate. While an amount of Rs 5,000 crore will be provided to the NHB a number of Rs 5,000 crore will be provided to NABARD. This move will help improve credit flow to the HFC, smaller NBFCs and microfinance companies.

The RBI has also raised the permissible loan to value ratio (LTV) for gold loans taken for non-agricultural purposes from 75 percent to 90 percent. The RBIs decision of keeping rates unchanged could have been influenced by the CPI inflation which came in at 6.09 percent for the month of June and is above the RBI’s upper threshold of 6 percent. While further rate cuts by the RBI will be dependent on inflation coming down current levels, we expect the RBI will try to ensure adequate credit flow to the economy along with taking steps to ensure the full transmission of the 250 bps rate cuts done so far.

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First Published on Aug 6, 2020 03:11 pm