Monetary Policy: RBI Returns To A More Active Credit Policy To Boost Retail, MSME Credit

The Reserve Bank of India, often called a full service central bank which doubles up as a banking regulator, returned to more active management of credit policies with a series of steps intended to improve the flow of funds to a weak economy.

The push for improved credit is important at a time when fiscal and monetary space to boost the economy is limited. India’s monetary policy committee left its benchmark repo rate unchanged on Thursday. The government, while widening its fiscal deficit, intends to bring down the budget gap next year.

As such, credit policies are the best available option to boost the economy. To do this, the RBI announced the following measures:

• Banks will be given cash reserve ratio relief on incremental auto loans, retail housing loans and and all micro, small and medium enterprises loans. This, the RBI hopes, will incentivise banks to lend to these sectors.
• The relief on CRR will be available on loans given between Jan.30 and July 31, in an attempt to speed up credit flow.

The RBI had earlier reduced risk weights on retail loans, excluding credit card loans, to incentivise the flow of credit.

Bankers feel that the changes in the CRR norms would help in reducing costs for banks, but will mean little for transmission.

The CEO of a large public sector bank, speaking on condition of anonymity, said transmission could be limited to 15-20 basis points only owing to the RBI’s latest move. To truly improve transmission, there is a need to bring down the small savings rate, the person said.

The head of retail and SME lending at a large private bank also said that the move to cut CRR requirement could be beneficial to banks but it’s unclear how these benefits could be passed on to the end customer.

Since the external benchmark-linked loan regime is strict in terms of allowing space to tinker rates, it is unclear how the lower cost could be transmitted, the banker said. Under the external benchmark-linked lending rate regime, banks can change the spread on the benchmark only once in three years. The risk premium, which is linked to the customer’s credit score, can be changed only if the risk profile changes considerably.

Responding to these decisions Jaideep Iyer, head of strategy at RBL Bank said it was quite critical to have some policy measures to ensure banks overcome some risk aversion.

“Firstly, the regulator is giving a message that they would want encouragement of credit transmission to specific sectors. Secondly, they have given absolute benefit in terms of incentivising banks by exempting them from Net Demand and Time Liabilities (NDTL) requirements for incremental lending. That’s a reasonably significant move as it would result in a percentage point benefit to banks,” Iyer said.

According to Anil Gupta, vice president and sector head- financial sector ratings at ICRA, removing CRR requirements for additional credit will benefit banks by reducing overall operational cost by nearly 25 basis points. This could be passed on to customers in the form of reduced premium on fresh external benchmark linked lending, he said. “It is likely that fresh lending till July 31 could see lower risk premiums for retail and MSME customers. This could help in improving credit flow,” Gupta said.

Asutosh Kumar Misra, head of research at Ashika Stock Broking, however, sees a 30-40 basis-point improvement in the return on equity for banks owing this move.

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Scheme To Recast MSME Loans Extended

The RBI said it will extend the one-time restructuring scheme for loans to MSMEs till Dec. 31. The recast scheme, announced in January last year, was to expire on March 31.

Goods and services tax-registered companies whose MSME accounts are in default as on Jan. 1, 2020 will be eligible for the one-time restructuring.

Union Finance Minister Nirmala Sitharaman said in her Feb. 1 Union Budget speech that the government had asked the RBI to consider extending the relief by a year till March 31, 2021.

“This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated Jan. 1, 2019 as also the MSME entities which have become stressed thereafter,” the regulator said in its statement.

The RBI said it’s a one-time dispensation. Last year, when the scheme was announced, analysts had pointed out that this could be the regulator’s return to forbearance.

According to Gupta of ICRA Ratings, the pool of eligible loans which can be restructured under the scheme has now been reduced to companies which are GST registered. This condition was not mentioned in the January 2019 scheme.

“If the GST condition had not been placed now, the pool of accounts eligible for restructuring could have been much larger. [Yet] at a time when the economy is yet to show any signs of revival, it is prudent of the RBI to have extended the restructuring scheme by some more months,” Gupta said.

Separately, the RBI said that loans to medium size enterprises, starting April 1, would be linked to an external benchmark. The regulator had linked all fresh floating-rate loans to the retail sector and to MSMEs to an external benchmark starting Oct. 1.

Relief To Commercial Real Estate

The regulator also announced measures to ease the stress on the commercial real estate sector. Borrowers facing repayment pressures because of situations beyond their control would be allowed to extend the date of commencement of commercial operations by a year. This extension would be allowed without classifying the loan account as a non-performing asset.

“This would complement the initiatives taken by the government of India in the real estate sector,” the RBI said. It’s in line with the RBI guidelines on other non-infrastructure loans.

Majors lenders to the real estate sector, including Housing Development Finance Corporation Ltd. Ltd, have been seeking a one-time restructuring scheme for genuinely stressed developers. Keki Mistry, vice chairman and CEO of HDFC, had said that lenders cannot extend further credit to real estate borrowers classified as NPAs since extant guidelines would dictate that any fresh lending be also classified as bad loans.

The RBI has stayed away from a restructuring scheme while providing some relief to under construction projects.

The relief could help companies manage their cash flow better in case there are some delays in execution of the project, Gupta of ICRA said. “Since typically the repayment cycle kicks in from the date of commencement, an extension will allow companies to use any income in completing the project, rather than ensuring repayments.”

According to Saswata Guha, director, at Fitch Ratings India, perhaps there was a need to lend a helping hand to the MSME and real estate sector in the current macroeconomic climate. “The measures are well-intended but are forbearances the right approach?”, he asked. “Moreover, prodding banks to lend more to specific sectors seems to suggest that we are trying to grow out of the problem.”