Experts and industry representatives feel that the RBI’s move to address liquidity challenges in the midst of the COVID-19 pandemic is a positive step that can go a long way in instilling confidence in the economy.
The RBI's move is expected to address liquidity problems, particularly for the NBFCs, MFIs and the state governments. Many experts feel that the reduction in LCR limits for banks to 80 per cent from the current 100 per cent is a good liquidity measure in the current economic situation. The move on reduction of reverse repo rate by 25 basis points will push banks to open up the credit flow to economic activities.
However, the general perception is that while the RBI is doing its part in providing reliefs in the current times, the market 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.
Elaborating on the measures taken by the RBI, market experts such as Dhiraj Relli, MD and CEO, HDFC Securities, felt the that central bank's efforts are multi-fold. He says that they are aimed to push banks to do more lending (by cutting reverse repo rate), providing more liquidity to them (higher TLTRO-2 funds, special refinance facility of Rs 15,000 crore to SIDBI and prescribing lower liquidity coverage ratio) and prescribing some reliefs and some fresh moves to create provisions against slippages. He says that the measures will also provide more credit to NBFCs (especially smaller ones) by prescribing that at least 50 percent of funds under TLTRO-2 must be lent to such entities.
“The special refinance facilities of Rs 10,000 crore to NHB will help housing finance companies avail more liquidity. Also NBFCs can grant relaxed NPA classification to their borrowers and NBFCs can extend realty loans by one year if projects are delayed for reasons beyond their control. RBI's measures will also alleviate the woes faced by state governments by increasing the States Ways and Means Advances (WMA) limit by 60 per cent. This will provide greater comfort to states,” remarked Relli.
There is also a perception that the RBI's move to cut reverse repo rate is to discourage the reverse money flow to RBI. However, many are doubtful whether this flow can be stemmed easily. Experts say that 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 reaffirmed its commitment to support the economy and the markets, and has 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 is no lending by banks nor any investment into sectors that require more support. Banks are parking money with RBI on a daily basis... an amount that is close to Rs 6 Lakh crore,” observed Dr. Joseph Thomas, head of research, Emkay Wealth Management.
“So whatever money the banks have with them and whatever they are getting from RBI, the banks are giving back to RBI instead of investing it or lending it. RBI has now specified where the money should go to encourage sectoral lending. Once a clear channelisation of credit to segments or sectors that require the support is achieved, the economy will get the much-needed stimulus,” explains Thomas.
Many experts point out that RBI's move—though aimed at addressing some of the liquidity problems particularly for NBFCs, MFIs and state governments—should also ensure that the MSME sector also gets some liquidity boost. For this, some more clarity is required on part of how fast the banks start the lending process.
“Temporary elongation of NPA recognition period and lowering of liquidity coverage ratios are positive moves. Reverse-repo rate cut should marginally nudge banks to lend. If credit growth does not accelerate, we would expect the cut in reverse repo to continue,” remarked Sujan Hajra, chief economist and executive director, Anand Rathi Shares and Stock Brokers.
Experts also say that banks should act fast in extending credit to India Inc. and all the measures should be expedited faster than before. Besides this, the NBFCs were facing extreme liquidity issues that needed an urgent redressal.
“TLTRO 2.0 is an important step in safeguarding the stability of the non-banks. However, it's equally important to ensure this additional liquidity is available to a wider spectrum of NBFCs and MFIs and not be limited to a few. The refinancing measures through NHB, SIDBI, NABARD, etc. is a welcome relief to HFCs and NBFCs as non-banks with limited incremental funding options were facing increasing risks of default,” pointed out Vydianathan Ramaswamy, director, ratings, at Brickwork Ratings.
The RBI’s move is expected to refinance the real estate segment that had been bleeding for a while. As per the latest data by RBI, the NBFCs’ outstanding credit to the commercial real estate segment stood at Rs 1,29,359 crore as of end of September 2019.
“Today’s announcement will give an initial fillip to the real estate sector. The central bank’s focus to provide credit flow to NBFCs is a key step. The relaxation of NPA classification norms and extension of one year for commencement of projects to real estate developers by NBFCs will provide the much-needed relief to the sector. The refinance facility to the extent of Rs 10,000 crore to NHB is a welcome move to provide the much-needed liquidity to housing finance companies,” remarked Ramesh Nair, CEO and country head, JLL India.
