-Kanakprabha Jethani | Executive
The Reserve Bank of India (RBI) released its Sixth Bi-monthly Monetary Policy Statement, 2019-20 along with the Statement on Developmental and Regulatory Policies (‘Statement’) on February 06, 2020. The said Statement proposed various measures primarily to spur the growth impulses and push credit offtake. Some of the major proposals are discussed below.
In particular, as our analysis shows, there will be increased opportunities for co-lending between banks and NBFCs.
Enhancing credit to specific sectors
- Allowing Scheduled Commercial Banks (SCBs) to deduct from their net demand and time liabilities (NDTL), the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020 for maintenance of cash reserve ratio (CRR).
The Reserve maintenance requirement for a bank= CRR*Bank Deposits/NDTL. Due to such reduction from NDTL, the reserve maintenance requirement will be reduced. This will act as a motivating factor for banks to lend more to the aforementioned sectors. Therefore, banks save the opportunity loss on account of CRR on such incremental lending. Notably, the CRR currently is 4%, and does not fetch any return to the banks. Assuming that a bank may earn 10% interest on the lending to the specific sector, this means a direct improvement in the return to the bank to the extent of 40 bps.
It is important to note that this relaxation is only for loans directly disbursed by the banks. Therefore, acquisition of loan pools by way of direct assignment or purchase of PTCs will not qualify for this.
However, lot of banks have entered into co-lending arrangements with NBFCs. Such arrangements result into a credit originated directly in the books of the bank, and therefore, ought to qualify for the relaxation of the CRR requirement. Loans for automobiles (which may apparently include both passenger and commercial vehicles) is one segment where NBFC-bank co-lending arrangements may work very well. The same goes for loans to MSMEs.
- Pricing of loans to medium enterprises by SCBs to be linked to an external benchmark.
Linking the pricing of loans to an external benchmark, say repo rate, will ensure that interest rates reflect the current market conditions. The external benchmark rates are currently administered by Financial Benchmark India Pvt. Ltd. (FBIL)
- Extension of time limit for one-time restructuring scheme for loans granted to MSMEs to December 31, 2020.
Under this scheme, loans in which there is a default in repayment, but the same is being classified as standard asset in the books of the lender as on January 01, 2020.
Usually, when an account is restructured, the asset classification of such asset is downgraded. However, the accounts restructured under this scheme shall continue to be classified as standard. The restructuring is to be implemented by December 31, 2020 instead of the earlier limit of March 31, 2020. This scheme will enable the defaulted accounts to be restructured without impacting the Balance Sheet of the lender since the provisioning requirements would remain the same.
Regulating the HFCs
- Draft revised regulations with respect to HFCs on RBI website by the end of the month, for public comments. Till the new regulations are issued, HFCs shall continue to be regulated by the existing regulations of the National Housing Bank (NHB).
Upon introduction of the new framework, HFCs will come under regulatory control of the RBI and the efforts of NHB may then be focused towards development of housing finance market.
VKC Comment: We will be keeping a watch on these draft guidelines and will come back with analysis as and when these draft regulations are placed on the RBI website.
Relaxing the norms for Asset Classification
- Extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year, shall not result in downgrading the asset classification.
Due to introduction of this provision, project loans given for commercial real estate will continue to be classified as standard even if there is a default in repayment, in case the DCCO is extended.
Aids to Digital Payment Systems
- A Digital Payments Index to be issued to capture the extent of digitisation of payments. The same shall be made available w.e.f July 2020.
This index will reflect the penetration of digital payments in the financial markets.
- Framework to establish Self-Regulatory Organisation (SRO) for digital payment systems which will serve as a two-way communication channel between the players and the regulator/supervisor. The framework will be put in place by April 2020.
Establishment of SRO will result into enhanced control and regulation of the digital payments space while simultaneously ensuring reduced bureaucracy and faster resolution of issues.
We will be coming up with detailed analysis of the developments as and when they are introduced.