No action on interest rates but a slew of measures supporting recast of loans of all kinds. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) at the end of its second meeting this year today was unanimous in its view that there is no need to cut the repo rate further from the 4% now. So loan rates will stay low but may not trend lower, for the time being.
The repo rate a year ago was at 5.75% and the reduction already made has been seen as sufficient for now. Consequently, loan rates have dropped to 7% levels for Housing loans and other loans too are less costly already.
Analysts were split on expectations from the MPC with predictions of both a cut and a pause.
Perhaps, the RBI is in a wait-and-watch mode and holding its fire, should the situation worsen further. Cutting interest rates drastically too early may have led to running out of options later on.
The impact of Covid on the Indian economy is still not clear and striking a note of caution, the RBI states that “a more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks”.
So the RBI turned to non-monetary tools to provide balm and relief to borrowers and banks. As per current norms, if any loan is restructured it should be immediately downgraded as a Non-Performing Asset and then provisions will have to be made accordingly.
So banks did not have any “incentive” to go for restructuring because either way, they would insure the cost of provisions, which is a drag on earnings/profits. What the RBI has now done is to open a window by which, subject to some stringent norms, restructuring of corporate and personal loans will be possible for banks.
The higher-value borrowers in the non-MSME segment will be able to get their loans recast now if they have problems of cash flows and are unable to service their debt.
But the la-la days of the Corporate Debt Restructuring (CDR) mechanism are gone.
Now, banks will have to provide 10% of the loan amount even if they allow restructuring. This would imply that they will permit only really viable proposals to be recast.
It may be better to bite the bullet now and take a hit on profits now rather than kick the can down the road, hoping that somehow the borrower will come out of his stress with the passage of time.
It should be recalled that the RBI had earlier itself provided freedom for banks to restructure loans of the Micro, Small and Medium sector borrowers.
Loans in this segment. which were Standard as on January 1, 2020, can be restructured till December 31, 2020, to enable them to tide over COVID-related financial stress.
Today the RBI said that MSME units, which were Standard as on March 1, 2020, could also be restructured and the time norm for completion of the process of restructuring would be extended to March 31, 2020.
In a clear attempt to make available more money for consumption, the RBI also revised the Loan to Value Ratio (LTV) for gold loans from 75% to 90%.
As gold prices zoom, those taking gold loans from banks will get more money for the same quantity of gold now.
Certainly, it is to push monetisation of gold by small borrowers for consumption purposes.
The RBI has also put brakes on borrowers freely opening current accounts with non-lender banks and trying to game their cash-flows.
Henceforth, cash credit and overdraft borrowers will not be able to open current accounts with other banks. Term loan borrowers may be able to open, subject to very strict conditions.
The MPC statement makes it clear that downside risks remain in the current year, inflation is also in the uncertain territory and it will require tremendous hard work by a nation hoping to become a 5 Trillion-dollar economy to overcome this turbulent time of troubles and return to the path of a 6/7% rate of growth.
The picture that emerges is that the RBI Governor and his team are in sync with the Government to do whatever it takes to help businesses overcome.
S.Adikesavan is a top executive with a public sector bank. Views are personal.