RBI’s Fresh Salvo To Boost Bond Markets, Ease States’ And NBFCs’ Borrowings

In March, we discussed how the RBI (Reserve Bank of India) had come out all guns blazing to shore up the fortunes of a struggling financial system. Since the system and sentiments continue to be in a morass, the regulator had to throw a longer rope for the system to cling on to and survive. And there was a commitment to do more if required; today’s announcements are one in a series of measures.

The salient measures announced today are as follows.

Rate tweaks and liquidity infusion

Measure: The reverse repo rate was reduced from 4 per cent to 3.75 per cent, while maintaining the repo rate at 4.4 per cent. The corridor between the repo and reverse repo thus moves up to 65 basis points (0.65 per cent).

Impact: The banking system’s liquidity has been in surplus for some time and is now even more so due to further injections from the RBI. The purpose of the liquidity injection by the RBI is that banks should lend it forward to propel the economy. That, however, is not happening as credit demand is low in the current situation. The huge liquidity surplus is being parked with the RBI itself, at the reverse repo rate. Reducing the reverse repo rate means that banks would get a lower rate of interest, and hence would be incentivised to lend the money onward. It is the right action from the RBI. Given the tepid demand, we hope credit off-take picks up in the future.

Measure: There is another round of Targeted Long Term Repo Operations (TLTRO) announced; this is for Rs 50,000 crore and is meant for NBFCs (Non-banking Finance Companies), of which 50 per cent is meant for mid/small-sized NBFCs and MFIs (Micro Finance Institutions). This has to be done within one month of availing it and will be under HTM (held-to-maturity) for banks, i.e., not subject to mark-to-market volatility.


-While all sectors of the economy need support, in the financial services ecosystem, NBFCs do not have the same standing as banks and need a long rope. NBFCs and MFIs extend loans to retail customers and MSMEs and thereby serve an important economic function. The TLTRO funds injected so far were directed to blue-chip corporates. That was required to shore up the corporate bond market, but the next rung was not getting the required support. TLTRO 2.0 would assuage the struggling NBFC-MFI sectors.

-For mutual fund investors, this is a positive. In debt funds with exposure to NBFC securities and particularly NBFCs rated less than AAA (the larger component of the universe), yields had moved up with the prevailing negative sentiments. Now, MFs (mutual funds) facing redemption pressure will be able to sell these instruments with a lesser impact on the price.

Bad-loan classification and refinancing institutions

Measure: The 90-day classification rule, which states that an asset will have to be classified as an NPA if it is 90 days past due, will now exclude the moratorium period. Banks will have to maintain an additional 10 per cent provision on these standstill accounts over the next two quarters, which can later be adjusted against the provision requirements for slippage.

Impact: Since the announcement of the moratorium on March 27, 2020, there was confusion about classification. If someone takes the moratorium, while on one hand the interest meter is ticking, would it be classified as an NPA as the loan is not being serviced? That has been clarified now; in the moratorium period, the clock stops ticking for computation of number of days past due.

Measure: Refinancing through NABARD, SIDBI and NHB: To provide special refinancing for Rs 50,000 crore to enable them to meet sectoral credit needs. Break-up: NABARD-Rs 25,000 crore, SIDBI-Rs 15,000 crore and the balance Rs 10,000 crore for NHB. Additional requirement, if any, for these institutions would be met by the RBI. The advances will be charged at repo rate.

Impact: For channelizing credit flows, the RBI is not only pushing banks (reduced reverse repo rates) and supporting the corporate bond market (TLTRO 1 and 2), but also injecting liquidity into the institutions that would administer it at the ground level.

Measure: The WMA limit (ways and means advances) for States has been increased by 60 per cent against 30 per cent announced earlier, and is available till September 2020. This would enable them to plan their market borrowing program.

Impact: Recently, the borrowing cost of States in SDL (State Development Loans) primary auctions had increased significantly. This would help cool down the borrowing cost of States.

Other measures and directions for Banks:

Extension of resolution timeline: In the case of large accounts under default, an additional provision of 20 per cent is required if the recovery plan is not completed in 210 days. This has been extended further by 90 days.

Banks shall not pay any dividend for financial year 2019-20; this will be reviewed on the basis of the situation at the time of the announcement of the half-year ended September 2020 results.

The liquidity coverage ratio has been lowered to 80 per cent from 100 per cent with immediate effect. This will be ramped up in a phased manner to 90 per cent on October 1, 2020 and to 100 per cent by FY 2021-22.

Impact: The RBI has to keep an eye on the health and functioning of banks as well, while making things easier for fighting the pandemic. These are some such measures.

The Government and the RBI have been taking a series of calibrated steps to fight the pandemic, as against big-bang measures announced in some economies that are more desperate and sinking into recession. The RBI stands committed to support the financial system and there would be more measures in the offing, as and when required. As of now, today’s set of announcements would: (a) help cool the corporate bond and SDL markets; (b) support NBFCs and MFIs; and (c) push banks and financial institutions towards lending.

The impact on yield levels would be soothing at the shorter end of the yield curve as part of the money currently parked under the reverse repo window would chase shorter maturity T-Bills. At the longer end of the yield curve also the impact is positive, but to a lesser extent. There are concerns on fiscal slippage and additional Government borrowing.


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