Reserve Bank of India Governor Shaktikanta Das on September 16 said the central bank is prepared to take further measures to prepare the economy and banking system to fight the Covid-19 pandemic.
The governor said this at a virtual seminar organized by industry lobby FICCI.
The governor said the economic recovery remains slow and will be gradual. Further, bank credit growth remains muted in the system, Das said.
The RBI has taken a slew of measures beginning March to help the banking system fight the Covid-19 pandemic. These include a cumulative repo rate cut of 115 bps and an array of liquidity measures to help various sectors, including multiple rounds of targeted long term repo operations.
Restructuring to help business recovery
Das said the idea of a one-time restructuring or resolution plan for COVID-hit stressed assets is to help businesses that are suffering due to the coronavirus.
In the wake of COVID, the RBI had announced a six months moratorium for all term loans and subsequently announced a one-time recast scheme. Recently, an expert panel headed by K V Kamath had submitted its proposals with respect to the financial parameters that need to be factored in for the loan recast process. Under this, banks can offer moratorium up to two years for COVID-hit accounts.
Cash flows of firms that were otherwise doing well have also been hit, Das said, adding, “The idea of one-time loan recast is to help these firms recover from financial difficulties while helping banking system to control NPAs.”
The revival of businesses will help keep NPAs low, Das said.
There is a careful and balanced decision on the part of the RBI with respect to restructuring. On the one hand, the concern of any bank should be the protection of depositors’ interest, Das said, adding at the same time, banks have to keep the financial stability of banking sector in mind.
“We don’t want NPAs to go up steeply,” said Das.
Banking system NPAs are at elevated levels at this stage. Bad loans spiked following a prolonged NPA clean-up process initiated in 2015 by former governor Raghuram Rajan. The COVID impact is likely to worsen the situation. According to RBI’s estimates, gross NPAs of banks could rise to around 15 per cent by March next year in a worst-case scenario.
The vulnerability of the NBFC sector a concern
To a question on why gold loan NBFCs are not treated at par with commercial banks when it comes to loan-to-value ratio, Das said the RBI has taken this approach as a precautionary measure to ensure NBFC segment, especially gold loan NBFCs, doesn’t plunge into another crisis.
In August, the RBI increased the permissible LTV ratio for loans against pledge of gold ornaments and jewellery for non-agricultural purposes, from 75 per cent to 90 percent. This relaxation will be available till March 31, 2021; beyond that, it will be again back to 75 per cent.
However, this measure was applicable only to banks and not NBFCs. Following this, NBFCs had approached regulator seeking level playing field.
Justifying the logic behind this, Das said gold loan NBFCs have a higher risk since much of the loan book is concentrated on gold loans, whereas for the banks, gold loans are only a small portion of their whole book. NBFCs were subjected to light regulation till a few years ago and this has resulted in a crisis in certain companies, Das recalled.
The RBI wants to ensure no NBFC fails, Das said, adding that this is the logic why NBFCs continue to have tighter regulations.