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RBI's new measures may not be a 'bazooka', experts say expectations from govt high

Jaspal Bindra of Centrum Group said the RBI has shown pragmatism while announcing the second round of measures, aimed at maintaining liquidity and incentivizing credit flows.

April 18, 2020 / 08:09 PM IST

The Reserve Bank of India provided a big relief to small and mid-sized NBFCs and MFIs, and also relaxed NPA recognition norms for NBFCs, but the market came off from the day's high after the announcement as made.

The BSE Sensex gained 1.5 percent to trade at 31,056.22 and the Nifty50 rose 1.39 percent to 9,117.90 at the time of writing this copy. Both indices had rallied more than 3 percent each ahead of the RBI announcement.

Also read: RBI announces additional measures to fight slowdown; highlights from the presser

Today the RBI has decided to conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of Rs 50,000 crore and said funds availed by banks under TLTRO 2.0 should be invested in investment-grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 percent of the total amount availed going to small and mid-sized NBFCs and MFIs.

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"This will comprise Rs 25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); Rs 15,000 crore to SIDBI for on-lending/refinancing; and Rs 10,000 crore to NHB for supporting housing finance companies (HFCs). Advances under this facility will be charged at the RBI's policy repo rate at the time of availment," said the RBI.

Along with the above measures, the RBI also reduced the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 3.75 percent with immediate effect and relaxed NPA classification norms.

Experts feel these liquidity measures are expected to benefit NBFCs, HFCs, banks etc.

"RBI has provided supplementary measures to address financial market liquidity, NPA recognition, and operational concerns. Key measures that are likely to have a positive impact are a reverse repo cut, additional targeted LTRO for NBFCs and additional funds for HFC," Sahil Kapoor, Chief Market Strategist at Edelweiss Broking told Moneycontrol.

This along with relaxation in NPA classification norms is likely to soothe markets, he said.

He also expects RBI and Government to bring in a COVID bond or monetize central government deficits, which could happen down the line.

RBI's whatever it takes stance is encouraging and market off highs is largely due to volatility, he said.

Sundar Sanmukhani, Head of Fundamental Research Desk at Choice Broking also agreed with Kapoor, saying RBI's latest announcements to infuse liquidity and expand bank credit are expected to provide big relief to the non-banking financial sector (NFBCs) as 50 percent of the proposed TLTRO worth Rs 50,000 crore will be invested in small and mid-sized NBFCs and MFIs.

On the relaxation of NPA recognition norms for NBFCs, he said banks would also get relaxation on special mentioned account, which are unpaid with 60-90 days as on March, but have to make 10 percent provisioning against such standstill account.

Here is what other experts said:

Vishal Kampani, Managing Director, JM Financial Group

The RBI Governor has announced some commendable measures and acted swiftly to offer Rs 1 lakh crore liquidity window and cut reverse repo rate to support NBFCs and that promptness signals a strong intent of the RBI to turn the wheel of the economy. The reverse repo rate cut will prompt banks to increase lending, leading to a broader liquidity transmission to the NBFC sector. Broadly these measures will strengthen the liquidity position of the NBFCs and corporates. The banks, on the other hand, need to ensure that the credit transmission to the NFBCs take place regardless of the credit-ratings. I am happy to learn that this is just the beginning and RBI will come up with further measures so that the economy is able to tackle the COVID-19 challenges.

Jaspal Bindra - Executive Chairman, Centrum Group

The RBI has shown pragmatism while announcing the second round of measures, aimed at maintaining liquidity and incentivizing credit flows. Banks are required to invest a significant portion of the TLTRO with NBFCs & MFIs, is positive as they have been hit significantly. Relief packages of Rs 50,000 crore allotted to NABARD, SIDBI and NHB combined with the reduction in reverse REPO rate will incentivize banks and NBFCs to step up their lending activities. Additionally, the 90 day NPA norm won’t be applicable to loans where the moratorium is granted. This along with 1 year extension on loans given to the real estate sector will help preserve asset quality.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers

RBI's move today addressed some of the liquidity problems particularly for NBFCs, MFIs and state governments. MSME sector should also get some liquidity boost. The picture for banks is mixed. Temporary elongation of NPA recognition period and lowering of liquidity coverage ratios are positive. Cut in reverse-repo rate and continued need for provisioning on overdue credit. Increased TLTRO and WMA limit for state governments should keep bond yield range bound. This should benefit PSU banks with sizable excess reserve. Reverse-repo rate cut should marginally nudge banks to lend. If credit growth does not accelerate, would expect the cut in reverse-repo to continue.

Joseph Thomas, Head of Research - Emkay Wealth Management

RBI has reaffirmed its commitment to support the economy and the markets, and have announced an additional Rs 50,000 crore TLTRO. This would be targeted at supporting corporates and smaller private entities. But the issue is that there no lending by banks nor any investment into sectors that require more support. Banks are parking with RBI on a daily basis an amount close to Rs 6 lakh crore. So whatever money they have with them and whatever they are getting from RBI, the banks are giving back to RBI instead of investing it or lending it.

The reverse repo rate cut is to discourage thus reverse flow to RBI. But is doubtful whether this flow can be stemmed easily. Banks are not lending or investing because they fear that under the current conditions they may be adversely impacted if they employ the money for investments or lending. Even three months back the approach of the banks was one of extreme caution.

RBI has now specified where the money should go to encourage sectoral lending. Once a clear channelization of credit to segments or sectors that require the support is achieved, the economy will get the much-needed stimulus.

Mihir Vora, Director & Chief Investment Officer, Max Life Insurance

The RBI announcement of the Reverse Repo rate cut, TLTRO 2 targeting NBFCs, Refinancing via NABARD, NHB, SIDBI are very essential to support the weakest segments of the economy.  RBI has been proactive in addressing the pain in areas which were not getting the full benefit of the earlier measures. Widening of the LAF corridor by reducing the Reverse Repo rate further disincentives banks to park money with the RBI and encourage lending.

RBI also increased the WMA limit for States. This will defer supply of State Govt. paper and lower spreads on SDL borrowings, which had shot up last week due to large supply getting bunched up.

TLTRO to be used for 50% large and 50% smaller NBFCs will help the NBFC sector which is under increasing stress of NPAs and liquidity. Standstill in asset classification and one time restructuring for commercial real estate will support banking sector stability.

The steps will ease some of the burden on the financial system and will aid to keep credit flowing to the economy.

Governor also kept the option of more such measures if needed. We expect a continuation of such measures by RBI and Government, given the gravity of the situation.

Overall, the measures are timely and welcome, though maybe not a 'bazooka' like we have seen in the highly unconventional tools used by the US Fed, European Central Bank, Bank of Japan etc.

All eyes are now on the government to announce fiscal measures to support the economy.

Jimeet Modi, Founder & CEO, SAMCO Securities & Stock

RBI's big bang stimulus was not a bazooka after all, given the expectations, rather it was a conservative approach and indicated a piecemeal manner of infusing liquidity. The measures though significant were not substantial enough as a mere Rs. 50,000 Crs in the form of TLTRO is rather conservative.

However, for the moment major concerns have been addressed as real estate and NBFC sectors have received massive relief, NBFCs (small and large) have liquidity coming in from TLTRO 2.0, financial institutions like SIDBI, NABARD and NHB have received liquidity directly from the RBI and there is relief on the NPA recognition and stressed asset reclassification for Banks.

To add to it, a 25bps reduction in the fixed reverse repo rate will enable banks to lend further and improve liquidity in the system. This has definitely boosted investor confidence as the quarterly numbers to be published by corporates will no longer be a horror story. Additionally, RBI’s openness of providing further relief if the situation worsens further is a big relief in these distressed times.

Dhiraj Relli, MD & CEO, HDFC Securities

NBFCs are clear beneficiaries of these measures. For investors in Banks the provision of higher liquidity and relaxation in provisioning norms are welcome, but the bar on dividend distribution and new provisioning norms are negatives for the time being. While the RBI is doing its part in providing reliefs in the current times, the street could keep expecting more and there could also be some concern about the time it would take for these measures to have an impact at the ground level.

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.
Moneycontrol News
first published: Apr 17, 2020 01:21 pm

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