To further ensure adequate flow of liquidity in the economy amid the Covid-19 crisis, and ease the pressure faced by corporates, including non-banking financial companies (NBFCs), the Reserve Bank of India (RBI) announced a slew of measures on Friday.

During a 37-minute address on Friday morning, RBI governor Shaktikanta Das announced some critical measures to maintain adequate liquidity in the system, facilitate bank credit flows, ease financial stress, and enable proper functioning of the financial markets.

Most notably, this included a ₹1-lakh crore liquidity window for small- and mid-sized corporates, including NBFCs and microfinance institutions (MFIs); a reduction in the reverse repo rate; a relaxation in asset classification for loans that were overdue even before March 31; and extension of the resolution timeline for stressed assets.

The biggest announcement came by way of a direct ₹1-lakh crore liquidity injection into the market on account of two measures. First, was the announcement of Targeted Long-Term Repo Operations 2.0 (TLTRO 2.0), through which the RBI will offer ₹50,000 crore in tranches to banks, who can use funds availed under this programme to invest in bonds, commercial papers, and non-convertible debentures of NBFCs, with at least 50% of the total amount availed being lent to small- and mid-sized NBFCs and MFIs. Till date, the RBI has injected around ₹1 lakh crore of funds into the banking system through TLTRO operations (including a ₹25,000-crore auction slated for Friday).

“It is, however, observed 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,” Das said. “The disruptions caused by Covid-19 have, however, more severely impacted small- and mid-sized corporates, including NBFCs and MFIs, in terms of access to liquidity.”

The primary aim of TLTRO 2.0, therefore, is to provide liquidity support to this segment of companies.

The second tranche of liquidity – another ₹50,000 crore – is being provided by the RBI through the refinance of all India financial institutions like the National Bank of Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), and National Housing Bank (NHB). As a part of this measure, NABARD will get ₹25,000 crore; SIDBI will get ₹15,000 crore, and NHB will get ₹10,000 crore. These financial institutions are expected, in turn, to lend these funds onwards to meet sectoral credit needs. NABARD can use these funds to refinance regional rural banks, cooperative banks, and MFIs; NHB can refinance housing finance companies; SIDBI can on-lend or refinance the debt of small industrial enterprises.

The other significant announcement made by the central bank governor on Friday had to do with the reverse repo rate–the rate at which the RBI borrows short-term money from banks –which was reduced to 3.75% from 4% earlier. This is expected to encourage banks to retain a larger share of funds with them, instead of parking it with the RBI and using it to lend to companies.

“As I have mentioned earlier, 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,” Das said. “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, it has been decided to reduce the fixed-rate reverse repo rate under the liquidity adjustment facility.”

In response to the rapidly evolving situation in wake of the Coronavirus pandemic–including an extension of the nationwide lockdown to May 3 (from a targeted date of April 15 earlier)–the RBI has also amended an earlier announcement on asset classification. According to the earlier announcement on March 27, the RBI had allowed lending institutions to grant a moratorium of three months on payment of dues falling between March 1 and May 31. “It is recognised 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,” Das observed. Consequently, the RBI had decided to exclude the period of moratorium offered on loan repayments (for standard accounts as of March 1) from the 90-day NPA (non-performing assets) norm. Apart from banks, NBFCs will also have the flexibility to offer such relief to borrowers under the prescribed accounting standards applicable to them.”

At the same time, to ensure that such a step doesn’t lead to a systemic risk at banks, the RBI mandated lenders to maintain a higher provision of 10% on all such accounts under the asset classification standstill for two quarters (ending March 2020 and June 2020, respectively). These provisions can be adjusted later or against the provisioning requirements for actual slippages in such accounts.

In a related step, the RBI has also allowed some leeway for extension of resolution timelines. According to the current guidelines, banks and NBFCs are supposed to hold an additional provision of 20% for large loans under default, for which a resolution plan hasn’t been implemented within 210 days from the date of default. “Recognising the challenges to resolution of stressed assets in the current volatile environment, it has been decided that the period for resolution shall be extended by 90 days,” Das said.

Also recognising that real estate is one of the worst impacted sectors during the current health and economic crisis being faced by the country and that non-banking lenders have built a sizeable exposure to commercial real estate to fill the gap left by traditional banks over the past few years, the RBI sought to offer some relief to NBFCs that have lent to commercial real estate companies as well. In terms of current guidelines for banks, the date for commencement of commercial operations in respect of loans to commercial real estate projects can be delayed by a year for reasons beyond the control of the project’s promoters. This is over and above the one-year extension permitted in the normal course of things, without treating the loan as being a restructured asset. “It has now been decided to extend similar treatment to loans given by NBFCs to commercial real estate as well.”

“This is indeed a big move and will bring 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, Anarock Property Consultants.

In addition to the aforementioned, there were some other measures announced by the RBI governor as well, including a reduction in the liquidity coverage ratio (LCR) requirement of banks to 80% from 100% (to be restored to 100% again by April 2021); a bar on payment of dividends out of profits by scheduled commercial banks and cooperative banks; and increasing the Ways and Means Advances (WMA) limit of states by 60% (till September 30) to allow them to manage their market borrowing programmes better.

While the industry has welcomed the RBI’s intervention, it is waiting to read the fine print of the announcement before evaluating the exact impact on their business operations.

“The RBI announcement today is constructive, commendable, and is in favour to support the financial system and at the same time the Indian real estate sector,” said Deo Shankar Tripathi, managing director and CEO of Aadhar Housing Finance. “Prevailing confusion on asset classification of loans has been put to an end with the announcement. This comes as a big relief to borrowers and lenders.”

Jaspal Bindra, executive chairman of Centrum Group, said the RBI had shown pragmatism while announcing the second round of measures, aimed at maintaining liquidity and incentivising credit flow.

“In brief, this is a big bazooka, but with caution and prudence,” says V.K. Vijaykumar, chief investment strategist at Geojit Financial Services. The markets also appeared to be enthused by the RBI’s announcements. The benchmark S&P BSE Sensex rose 1.51% during Friday’s trade (at 12:12 pm) to 31,065.67 points, with leading banks being some of the top gainers.

At the end of his address, governor Das also left headroom for further monetary stimulus in days to come as inflation eases. He pointed out that CPI (Consumer Price Index) inflation had declined to 5.9% according to the data available as of April 13. This included a significant 160 basis point softening of food inflation, he said. “These early developments suggest that inflation is on a declining trajectory, having fallen 170 basis points from its January 2020 peak,” Das said. “In the period ahead, inflation could recede even further, barring supply disruption shocks and may even settle well below the target fo 4% 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. This space needs to be used effectively and in-time.”

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