RBI governor Shaktikanta Das vowed on Friday to do “whatever it takes” to cushion the economic blow of the coronavirus pandemic, before drawing from the central bank’s arsenal to cut the reverse repo rate to nudge banks to lend, provide liquidity support to struggling non-banks and ease asset classification norms.
The measures, announced outside the monetary policy cycle, sets the stage for the second round of fiscal stimulus package that finance minister Nirmala Sitharaman is expected to announce any day now.
Governor Das’s pledge to do all that it takes to save the economy indicates that the Reserve Bank of India (RBI) will take aggressive steps, including further rate cuts, to support economic activity in a nation that has been locked down since March 25. Business leaders and economists have also sought a ₹9-10 trillion fiscal stimulus package.
RBI cut reverse repo rate by 25 basis points to 3.75% to discourage banks from parking excess liquidity under the liquidity adjustment facility (LAF) window. As on April 13, banks had parked as much as ₹6.9 trillion under the reverse repo window.
Banks now don’t have any incentive to park their surplus liquidity with the central bank and will be forced to either buy government securities or revive the credit cycle. Combined with some of the other liquidity boosting measures, regulatory forbearance on bad loans and re-channelling of funds to non-banking financial companies (NBFCs), including home financiers and micro-finance institutions, the immediate shock from loan defaults may have been kicked down the road. However, unlike banks, NBFCs may resume lending only selectively. At the same time, they may be able to refinance loans they had taken from the market, reducing the likelihood of defaults and financial shocks.
“Based on our continuing assessment of the macroeconomic situation and financial market conditions, we propose to take further measures to maintain adequate liquidity in the system and its constituents in the face of Covid-19 related dislocations; facilitate and incentivise bank credit flows; ease financial stress; and enable the normal functioning of markets,” Das said in his speech.
For non-banks and micro-financiers, RBI has proposed to make available liquidity worth ₹50,000 crore directly under the targeted long-term repo operation (TLTRO) 2.0 window and also indirectly through financial institutions such as Nabard, Small Industries Development Bank of India (Sidbi) and National Housing Bank (NHB).
Under the TLTRO 2.0 window, banks can access three-year funding from RBI to invest in investment grade papers of non-banking financial companies (NBFCs), with at least 50% invested in small and mid-sized NBFCs and micro-financiers. The central bank has also assured companies that it will make available further liquidity under this facility depending on the pattern of utilization and requirement. Banks will have a month to invest funds raised under TLTRO. Exposures under the facility will not be included while calculating large corporate exposure.
The move to announce a special liquidity facility under the TLTRO 2.0 window for NBFCs and micro-financiers comes as these companies failed to get funding under the earlier TLTRO scheme. While RBI had released as much as ₹75,000 crore out of ₹1 trillion promised amount, banks had utilized these funds for investing in only corporate papers with top ratings.
RBI is also providing a ₹50,000-crore special refinance facility for financial institutions—of this, ₹25,000 crore goes to Nabard for refinancing regional rural banks (RRBs), cooperative banks and micro-financiers; ₹15,000 crore to Sidbi for on-lending or refinancing; and ₹10,000 crore to NHB for supporting mortgage lenders.
In terms of regulatory measures, RBI tried to ease the burden of bad loans on banks by easing asset classification norms for all accounts where moratorium or deferment has been applied. This means that all accounts covered under the moratorium from March 1 to May 31, 2020 will be treated as non-performing assets (NPA) from 180 days overdue instead of 90 days overdue. However, banks will have to maintain additional 10% provisioning on these standstill accounts over the two quarters ending March 2020 and June 2020, which could put pressure on bank balance sheets.
RBI also extended the 210-day resolution period for all large stressed accounts identified under its June 7 circular by 90 days.
RBI also banned dividend payouts by banks and cooperative banks from profits pertaining to fiscal year 2019-20. This will be reviewed on the basis of financial position of banks at the end of the second quarter.
