RBI’s IInd Dose of Booster Measures to counter Indian Economy during COVID-19 crisis

On 27th March 2020 in its 7th Bimonthly Monetary Policy, RBI had announced measures aimed at minimizing the damage from Covid-19. The Monetary policy was directed towards the immediate problem of mitigating the damage caused by the virus wherein RBI has injected a total liquidity of ₹ 3.74 lakh crore to the system.

On April 14, the IMF released its global growth projections, revealing that in 2020, the global economy is expected to plunge into the worst recession since the Great Depression, far worse than the Global Financial Crisis. The IMF’s Economic Counsellor has named it the ‘Great Lockdown’, estimating the cumulative loss to global GDP over 2020 and 2021 at around 9 trillion US dollars – greater than the economies of Japan and Germany, combined. Within this downturn, the projections are replete with even sharper declines in output in various countries. India is among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent). In fact, this is the highest growth rate among the G 20 economies. For 2021, the IMF projects sizable V-shaped recoveries: close to 9 percentage points for global GDP. India is expected to post a sharp turnaround and resume its pre-COVID pre-slowdown trajectory by growing at 7.4 per cent in 2021-22.

Now on 17th April 2020 RBI Governor has announced additional measures based on the current assessment of the macroeconomic situation and financial market conditions. The measures announced by RBI serve the following purposes:

  1. To maintain  adequate liquidity in the system and its constituents in the face of  COVID-19 related dislocations;
  2. To facilitate and incentivise Bank credit flows;
  3. Ease Financial Stress and
  4. Enable the normal functioning of markets.

Liquidity Management:

Targeted Long Term Repo Operations (TLTRO) 2.0:

TLTRO 1 was announced in  the last month i.e. March 2020 but the deployment of TLTRO funds so far has largely been to bonds issued by public sector entities and large corporates, especially in primary issuances. Among  more severely impacted in terms of access to liquidity are small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs).

Under TLTRO-2.0 Rs 50000 Cr to be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs. These investments have to be made within one month of the availment of liquidity from the RBI. As in the case of TLTRO auctions conducted hitherto, investments made by banks under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will also not be reckoned under the large exposure framework.

RBI has issued guidelines for issuance of TLTRO-2.0 vide RBI's Press Release dt. 17th April 2020 with following apportionment:

The funds availed under TLTRO 2.0 shall be deployed in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs). At least 50 percent of the total funds availed shall be apportioned as given below:

  1. 10 per cent in securities/instruments issued by Micro Finance Institutions (MFIs);
  2. 15 per cent in securities/instruments issued by NBFCs with asset size of ₹ 500 crore and below; and
  3. 25 per cent in securities/instruments issued by NBFCs with assets size between ₹ 500 crores and ₹ 5,000 crores.

The asset size shall be determined as per the latest audited balance sheet of the investee institution/company.

Investments made under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The funds availed under this facility would have to be deployed within 30 working days from the date of the operation. 

In order to know all about TLTRO 1 & 2.0 please click on the following link: FAQ's on TLTRO 1 & TLTRO 2.0

Refinancing Facilities for All India Financial Institutions (AIFIs)

In view of the tightening of financial conditions in the wake of the COVID-19 pandemic, the All India financial institutions (AIFIs) such as the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB) institutions are facing difficulties in raising resources from the market. Accordingly,RBI decided to provide special refinance facilities for a total amount of ₹50,000 crore to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.
This will comprise:
₹25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs);
₹15,000 crore to SIDBI for on-lending/refinancing; and

₹ 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.

AIFIs such as NABARD, SIDBI and NHB play an important role in meeting the long-term funding requirements of agriculture and the rural sector, small industries, housing finance companies, NBFCs and MFIs. Hence this measure announced by RBI.

Liquidity Adjustment Facility: Fixed Rate Reverse Repo Rate

The surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI. On April 15, the amount absorbed under reverse repo operations was ₹6.9 lakh crore. In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, RBI reduced the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0 per cent to 3.75 per cent with immediate effect. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the Bank Rate remain unchanged at 4.65 per cent.

Cut in Reverse Repo rate and TLRTO 2.0 may lead to banks cutting their margins
The RBI today announced a cut of 25 basis points (100 basis points/bps = 1 per cent) in the reverse repo rate to 3.75 per cent from 4 per cent earlier. Though this will not have a direct impact on the interest rates consumers have to pay on loans but banks are likely to reduce their spread/ margin to lend more to the consumers. Fixed deposit rates may fall further.

Ways and Means Advances for States

On April 1, 2020 the RBI had announced an increase in the ways and means advances (WMA) limit of states by 30 per cent. RBI now decided to increase the WMA limit of states by 60 per cent over and above the level as on March 31, 2020 to provide greater comfort to the states for undertaking COVID-19 containment and mitigation efforts, and to plan their market borrowing programmes better. The increased limit will be available till September 30, 2020.

Regulatory Measures

Based on a review of the rapidly evolving situation, and consistent with the globally coordinated action committed to by the Basel Committee on Banking Supervision to alleviate the impact of Covid-19 on the global banking system, additional regulatory measures were announced by RBI.

Asset Classification

On March 27, 2020 the RBI had permitted lending institutions (LIs) to grant a moratorium of three months on payment of current dues falling between March 1 and May 31, 2020. It is recognized that the onset of COVID-19 has also exacerbated the challenges for such borrowers even to honour their commitments fallen due on or before February 29, 2020 in Standard Accounts. The Basel Committee on Banking Supervision (BCBS) has taken cognizance of the financial and economic impact of COVID-19 and very recently announced that “………. the payment moratorium periods (Public or granted by banks on a voluntary basis) relating to the COVID-19 outbreak can be excluded by banks from the number of days past due” in respect of NPA recognition.

- 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, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. NBFCs, which are required to comply with Indian Accounting Standards (IndAS), may be guided by the guidelines duly approved by their boards and as per advisories of the Institute of Chartered Accountants of India (ICAI) in recognition of impairments. In other words, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers.
-With the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, Banks will have to maintain higher provision of 10 per cent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.

Extension of Resolution Timeline

According to RBI’s prudential framework of resolution of stressed assets dated June 7, 2019, in the case of large accounts under default, Scheduled Commercial Banks, AIFIs, NBFC-ND-SIs and NBFC-D are currently required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default. Recognizing the challenges to resolution of stressed assets in the current volatile environment, RBI decided that the period for resolution plan shall be extended by 90 days.

Distribution of Dividend

It is imperative that banks conserve capital to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty. It has, therefore, been decided that in view of the COVID-19-related economic shock, scheduled commercial banks and cooperative banks shall not make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions. This restriction shall be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020.

Liquidity Coverage Ratio

The Reserve Bank has been proactively taking measures to address the systemic liquidity issues through a slew of monetary and market operations. In order to ease the liquidity position at the level of individual institutions, the LCR requirement for Scheduled Commercial Banks is being brought down from 100 per cent to 80 per cent with immediate effect. The LCR  requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021.

NBFC Loans to Commercial Real Estate Projects

In terms of the extant guidelines for banks, the date for commencement for commercial operations (DCCO) in respect of loans to commercial real estate projects delayed for reasons beyond the control of promoters can be extended by an additional one year, over and above the one-year extension permitted in normal course, without treating the same as restructuring. RBI has allowed similar treatment to loans given by NBFCs to commercial real estate. This will provide relief to NBFCs as well as the real estate sector.

Please click on the following link for :COVID19 Regulatory Package - Asset Classification and Provisioning

Expert Opinions - Reactions to RBI announcements|

TLTRO 2.0 to pump in additional Rs 50,000 Cr, which was much needed liquidity for NBFC and MFIs across and large and mid-sized firms. This should result in more transmission of funding to the corporate sectors. Additionally, all Standard assets as on March 1, 2020 shall exclude the moratorium period for NPA classification. Hence,  there would be a standstill of all such accounts from 3 months period, which was a much needed clarification that was awaited. The market should consider this favorably at this will ease liquidity and credit classifications issues: Rajosik Banerjee, Partner and Head - Financial Risk Management, KPMG in India

- 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.15000 cr to SIDBI and prescribing lower liquidity coverage ratio) and prescribing some reliefs and some fresh moves to create provisions against slippages.
- Provide more credit to NBFCs (especially smaller ones)  by prescribing that atleast 50% of funds under TLTRO-2 must be on lend to such entities. The special refinance facilities of Rs.10000 cr 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 1 year if projects delayed on reasons beyond control.
- Alleviate the woes faced by State Govts by increasing by 60% the States Ways & Means Advances (WMA) limit to provide greater comfort to states.
He added that 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.
We are extremely delighted and find a great sense of reassurance with the central bank taking cognizance of specific problems faced by real estate sector and proactively taking targeted measures to address those issues. The measures taken for liquidity support to NBFCs, HFCs and MFIs will meaningfully help the cause of the real estate sector. The move on reduction of reverse repo rate by 25 basis points shall push banks to open up the credit flow to economic activities. Similarly, allowing a 90 day extension for asset classification to loans that have been granted moratorium window is a critical step to assuage credit quality concern of lenders. Considering the lockdown and the impact on migrant labour workforce, there will be an inevitable delay in construction activity in real estate projects. Taking note of the situation, the central bank has provided one year project completion extension on asset classification for NBFC loans to CRE segment. Considering NBFCs have been very active in this segment, this announcement will ease the pressure of this segment too: Shishir Baijal, Chairman & Managing Director, Knight Frank India

(The Reactions of various experts are taken from Money Control.com :https://www.moneycontrol.com/news/business/rbi-governor-press-conference-live-updates-shaktikanta-das-coronavirus-package-rate-cut-cheaper-loans-covid-19-stimulus-moratorium-5157831.html )
Source: RBI Governor Speech dt 17th April 2020 rbi.org.in & Dainik Bhaskar (hindi)

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