RBI's liquidity enhancing measures to support financial sector hard-hit by pandemic

A delicate balancing act by the central bank to save economy from further downgrades

rbi-repo-rate Representational image | PTI

With the COVID-19 pandemic and the nationwide lockdown expected to hit the economy hard, the Reserve Bank of India (RBI) once again stepped in with a slew of measures aimed at boosting liquidity in the system, ensure funds are available for financial institutions and relaxed NPA (non-performing assets) classification for borrowers.

“The overarching objective is to keep the financial system and financial markets sound, liquid and smoothly functioning so that finance keeps flowing to all stakeholders, especially those that are disadvantaged and vulnerable,” said RBI Governor Shaktikanta Das.

One of the key measures announced on Friday was additional long-term repo operations to infuse liquidity in the system. The RBI has been conducting long-term repo operations (LTRO) periodically to ease liquidity constraints in the banking system. Since announced on March 27, it conducted three targeted LTRO, injecting cumulatively Rs 75,041 crore. Another TLTRO auction of Rs 25,000 crore will be conducted on Friday.  

Das, however, noted that the deployment of TLTRO funds so far has largely been to bonds issued by public sector entities and large corporates, especially in primary issuances. So, here comes TLTRO 2.0, under which there will be additional long-term repo operations of Rs 50,000 crore to start with.

The funds availed by banks under TLTRO 2.0 will have to be invested in investment grade bonds, commercial paper, and non-convertible debentures of non-banking finance companies (NBFCs), with at least 50 per cent of the total amount availed going to small and midsized NBFCs and micro finance institutions (MFIs).

“This will, in turn, ease the liquidity problem faced by NBFCs and MFIs to some extent, if their lender bank does not provide moratorium on payment of instalment and interest, which they are extending to their customers,” said Deo Shankar Tripathi, MD and CEO of Aadhar Housing Finance.

Furthermore, a special refinance facility of Rs 50,000 crore was also announced for all India financial institutions, which include National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB), which would help meet long-term funding requirements of agriculture, rural sectors, small industries, housing finance companies (HFCs) and MFIs.

This will include Rs 25,000 crore to NABARD for refinancing regional rural banks, cooperative banks and MFIs; Rs 15,000 crore to SIDBI for on-lending/refinancing; and Rs 10,000 crore to NHB for supporting HFCs.

Acuite Ratings and Research had estimated recently that top 11 NBFCs would need refinancing to the extent of Rs 10,000 crore to Rs 20,000 crore to sustain their operations and service their existing debt instruments. The amount will be significantly large for the entire NBFC and HFC universe, especially given clarity is yet to emerge whether banks extend them the moratorium too.

“In that context, the steps on TLTROs and refinance from financial institutions will go a long way to meet these short term liquidity gaps in the shadow banking sector and ensure their sustainability and therefore financial stability in the crisis period,”  said Suman Chowdhury, chief analytical officer at Acuite.

On March 27, the central bank had allowed lending institutions to grant a three-month moratorium on payment of current dues falling between March 1 and March 31 this year. Das on Thursday noted that the onset of COVID-19 may have exacerbated the challenges for such borrowers even to honour their commitments fallen due on or before February 29 in standard accounts. Therefore, in a major relief to such borrowers, there would be an “asset classification standstill” for all such accounts from March 1 to May 31.

“It has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period,” said Das.

This said, Chowdhury clarified that the moratorium period will not lead to a spurt in NPAs in the system and will allow borrowers across retail, SMEs and corporates availing the moratorium to access additional funding from banks or NBFCs. However, the higher 10 per cent provisioning requirement for these exposures under moratorium will impact profitability of banks and NBFCs.

“It's a delicate balancing act; while the moratorium has been made effective from March 1, banks have also been asked to make 10 per cent provisions in the next two quarters, and they have been asked to not announce dividends for FY20. This balancing act will need to be regularly revisited in the coming weeks and months and incremental steps may be needed as the situation evolves,” said Vijay Mani, partner, Deloitte India.

Under RBI’s prudential framework of resolution of stressed assets, in case of large accounts under default, banks are currently required to hold 20 per cent additional provision if a resolution plan has not been implemented within 210 days. That period of resolution plan has also been extended by 90 days.

There was also some relief in store for real estate developers. The date for commencement for commercial operations in respect of loans to commercial real estate projects delayed for reasons beyond the control of promoters can be extended by another year.

“This is indeed a big move and will bring the much-needed relief to cash-starved developers. It will help in easing out time for maintaining and managing cash flows for these developers,” said Anuj Puri, chairman of Anarock Property Consultants.

Meanwhile, the RBI has reduced the reverse repo rate, which is the rate at which the central bank borrows from banks, to 3.75 per cent from earlier 4 per cent, “to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy.”

“The lower reverse repo rate should encourage banks to lend out. However, given the current macro conditions, we need to watch how the banks utilize the various windows and options given by the RBI to assess whether credit growth increases and the extent of support that the NBFC sector gets,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.

The surplus liquidity in the system has risen significantly as the government steps up spending and the previous liquidity enhancing measures announced by the central bank. On April 15, the amount absorbed under reverse repo operations was Rs 6.9 lakh crore.

The repo rate, though, which is a prerogative of the of the monetary policy committee, was left unchanged. It was only on March 27 that the RBI MPC had slashed the repo rate by 75 basis points to 4.4 per cent.

However, Das has signalled that there could be more space available if inflation continues to fall.

According to data released earlier this week, retail inflation eased to a four month low of 5.91 per cent in March, compared with 6.58 per cent in February as vegetable prices eased. While the lockdown may push up vegetable prices in the short-term, core inflation is expected to trend downwards and economists do expect that there will be more room for the central bank to cut interest rates in the later part of the year.

“In the period ahead, inflation could recede even further, barring supply disruption shocks and may even settle well below the target of 4 per cent by the second half of 2020-21. Such an outlook would make policy space available to address the intensification of risks to growth and financial stability brought on by COVID-19,” said Das.