The outbreak and rapid transmission of the new Coronavirus has wreaked massive damage across global economies. In India, the economy has been witnessing acute growth pangs for over a year. The Covid-19 pandemic is making matters worse for it, an already fragile economy aspiring to reach the $5 trillion mark by 2025. This, in turn, obviously places the economy's financial ecosystem in high jeopardy.
The Reserve Bank of India has reaffirmed its faith in the banking system and governor Shaktikanta Das has assured investors that domestic banks are safe and sound. The central bank has stated it will remain vigilant and step in to preserve financial stability as and when required. Clearly, the RBI is on a war footing, and is prepared to do 'whatever it takes' to keep the economy afloat.
In line with this, Das announced a slew of measures on 27 March to enable financial lenders to navigate the crisis and support borrowers to tide over the rough patch. Key among them are:
1. Policy rate cut by 75 basis points to 4.4%2.
2. Targeted long-term repo operations from a three-year time frame of Rs 1 lakh crore.
3. Provision of additional liquidity through marginal standing facility of Rs 1.37 lakh crore by dipping into the statutory liquidity ratio to an extent of 100 bps.
4. Provision of additional liquidity of Rs 1.37 lakh crore by reducing the cash reserve ratio by 100 bps to 3.0%.
5. Deferment in implementation of capital conservation buffer (62 bps of risk weighted assets) for six months.
6. Non-reclassification of term loans and working capital loans for three months.
In a note to investors, Elara Capital says it expects the banking system to provide relief to borrowers in the short term. "But, the real picture of the impact would emerge after three months when a majority of dispensation gets over. The RBI would have to examine the impact of these measures, reassess the situation and come out with another set of measures," the brokerage outfit added in the note mentioned above.
The RBI's move to slash CRR and additional liquidity provision in MSF could inject over Rs 2.8 lakh crore liquidity in the system. Analysts point out the opportunity cost of the CRR foregone was the call money rate earlier. However, the additional liquidity available to lenders will allow banks to earn interest income. "In monetary terms, banks do not lose. Banks’ participation in targeted LTRO would be an issue due to the absence of genuine demand," said the note.
Furthermore, analysts say any potential revenue loss would be limited as there is no blanket offering of the three month moratorium on all term loans and EMIs. "Our discussions with various NBFC managements confirm that there won’t be any blanket offering to end-borrowers to opt for such deferment of payments but would be available only for the needy ones. The borrowers opting for deferment will either have to extend their tenure, else increase the quantum of EMIs to compensate for the revenue loss for NBFCs. Thus, technically there won’t be any major revenue loss for NBFCs at least till June 2020," say analysts at Emkay Global in a report dated 30 March.
The dire state of affairs has cast a shadow on not just credit growth, but also collections and recoveries. The lockdown will adversely affect financial institutions' credit cost in the coming months. "If the current situation is extended for a few more days, say May 2020 or beyond, the phase of elevated credit costs would remain at least for the next two quarters (H1FY21)," the report cautions.
The pace of transmission of rate cuts has been a typical concern in the past. In the last few days top lenders have announced rate cuts to soothe the pain and anxiety in the market. The country's largest public lender, the State Bank of India was among the first to announce a cut in rates offered to its customers.
"SBI passes on the entire 75 bps repo rate cut to its borrowers availing loans linked to external benchmark linked lending rate (EBR) as well as repo linked lending rate (RLLR). With this revision, SBI's EBR & RLLR come down by 75 bps, w.e.f 01st April' 2020 as under: EBR reduced to 7.05% p.a from 7.80% p.a; RLLR reduced to 6.65% p.a from 7.40% p.a," it said in a statement on Friday.
Lenders like Bank of Baroda and Bank of India have also cut interest rate on loans by up to 75 bps to pass on the relief extended by the central bank. Many more lenders are likely to announce rate cuts on loans in the coming days. However, in a bid to protect profitability, lenders are also likely to reduce deposit rates offered to customers in the coming days.