Category: Banking & Finance

NPAs may remain within projections: RBI Governor Shaktikanta Das

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The earlier FSR released in January 2021 had projected that the gross non-performing assets (GNPAs) of banks may rise to 13.5% by September 2021 in the baseline scenario.

By Ankur Mishra

Reserve Bank of India Governor Shaktikanta Das on Friday said that non-performing assets (NPAs) in the banking sector may remain within the range of projections made in the last financial stability report (FSR).

However, Das specified that final details would be out in the upcoming FSR, which will be released later this month.

The earlier FSR released in January 2021 had projected that the gross non-performing assets (GNPAs) of banks may rise to 13.5% by September 2021 in the baseline scenario.

“On the NPA situation, whatever projection we had given earlier in the last FSR. I think it will be within that (range),” RBI Governor Shaktikanta Das said in a press conference on Friday after releasing policy.

“I think the figures (NPAs) are quite manageable, but I would not say anything beyond that because our teams are assessing the numbers and we will spell out details in the upcoming financial stability report (FSR) later this month, ” Das further said.

In the policy statement, the RBI Governor also emphasised on building capital buffers and adequate provisioning for banks and NBFCs to mitigate the impact of Covid-19. Last week, RBI in its annual report, said that gross NPA ratio of banks decreased to 6.8% in December 2020 from 8.2% in March 2020.

The prudent provisioning by banks, even over and above regulatory prescriptions for accounts availing moratorium and undergoing restructuring, resulted in an improvement in the provision coverage ratio (PCR) of banks, RBI had said.

PCR improved to 75.5% at end-December 2020 from 66.6% in March 2020. Similarly, the capital to risk-weighted assets ratio (CRAR) of banks rose to 15.9% in December 2020, compared to 14.8% in March 2020.

The capital adequacy ratio of banks was aided by capital raising from the market by public and private sector banks, and retention of profits.

The central bank, in its annual report had, however, cautioned that asset quality of the banks needs to be closely monitored in the coming quarters.

The regulator had given the warning as the lenders will have to show a true picture of the bad loans after Supreme Court (SC) lifted interim stay on classifying NPAs in March 2021.

In August 2020, RBI had announced a six months moratorium for all term loan borrowers in the wake of Covid-19 impact on borrowers. The Supreme Court had directed lenders to waive compound interest of the borrowers during the moratorium period.

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SBI Chennai circle gets new CGM

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R Radhakrishna has taken charge as the new Chief General Manager of State Bank of India, Chennai circle.

Before his elevation as CGM, Radhakrishna served as GM, CCGRO (Commercial Clients Group Regional Office), in Bengaluru. The Chennai circle of the SBI has 1,248 bank branches under its jurisdiction across Tamil Nadu and Puducherry.

He joined the bank as Probationary Officer in 1987, and held various assignments in retail operations, HR and corporate credit. He has more than 33 years of experience in banking with more than 10 years of experience in high value credit, according to a statement.

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RBI doubles exposure threshold to ₹50 crore

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To expand the coverage of the Resolution Framework 2.0, the Reserve Bank of India on Friday announced a doubling of the maximum aggregate exposure to ₹50 crore.

“With a view to enabling a larger set of borrowers to avail of the benefits under Resolution Framework 2.0, it has been decided to expand the coverage of borrowers under the scheme by enhancing the maximum aggregate exposure threshold from ₹25-50 crore for MSMEs, non-MSME small businesses and loans to individuals for business purposes,” RBI Governor Shaktikanta Das said on Friday as part of the Monetary Policy Statement.

The Resolution Framework 2.0 was announced by the RBI on May 5 to help small borrowers tide over the impact of the second Covid-19 wave and State-level lockdowns.

“The above categories of borrowers to whom the lending institutions have aggregate exposure of not more than ₹50 crore as on March 31, 2021, and which have not been restructured earlier under any of the specified restructuring frameworks, shall be eligible for resolution under Resolution Framework 2.0,” said the Statement on Developmental and Regulatory Policies.

All other conditions will be the same. Banks were seeking an expansion in the aggregate exposure limit as it would help more borrowers. The expectation is that the higher limit will help a majority of such borrowers.

Welcome move

According to Subodh Rai, Chief Ratings Officer and Senior Director, CRISIL Ratings, almost two-thirds of the CRISIL-rated mid-size companies in the corporate sector (standard accounts as on March 31, 2021) now come under its ambit, compared with only half as per the previous threshold.

“Specifically, this will support companies with relatively weaker credit profiles,” he said.

 

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‘Consumer confidence slips to a new low in May’

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Our Bureau The Consumer Confidence Survey released by the Reserve Bank of India for the month of May showed that the consumer confidence for the current period weakened further.

The current situation index (CSI), which has been in the negative territory since July 2019, fell to a new all-time low as consumer perceptions on general economic situation and employment scenario lowered further.

The future expectations index (FEI) moved to pessimistic territory for the second time since the onset of the pandemic. This was driven by sharp fall in expectations on general economic situation, employment scenario and household income over one-year horizon.

Household spending, too, weakened in the latest survey round, with essential spending showing signs of moderation while non-essential spending continues to contract.

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RBI policy will help revive growth amidst second wave of Covid, say Bankers

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The status quo on rates and the accommodative stance of the Reserve Bank of India will help revive growth amidst the second wave of the Covid-19 pandemic, bankers said.

“The RBI approach to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis is quite encouraging. Given the challenging situation, the status quo on signal rates is on the expected line,” said Raj Kiran Rai, Chairman, Indian Banks’ Association and Managing Director and CEO, Union Bank of India.

Dinesh Khara, Chairman, State Bank of India, said the coordinated and active efforts of the RBI and government will support growth on a more durable basis during these difficult times

“The policy announcements of the RBI are clearly focused on extending liquidity support to stressed sectors by a more equitable distribution. The growth and inflation numbers have been revised looking at the current uncertain environment. The policy announcements are unequivocal in supporting growth through liquidity and market interventions through Regional Rural Banks and also by fast tracking resolution of stressed MSME sector,” he said.

“The decision of keeping the repo rate unchanged along with maintenance of accommodative stance is on expected lines and necessary to mitigate the growth uncertainty and inflation concerns,” said SS Mallikarjuna Rao, Managing Director and CEO, Punjab National Bank.

Zarin Daruwala, Cluster CEO, India and South Asia markets (Bangladesh, Nepal and Sri Lanka), Standard Chartered Bank, said, RBI’s reiteration of its accommodative stance till economic growth recovers, should help ease financial conditions and cap interest rates.

“RBI continued its focus on targeted credit delivery to sectors in need of liquidity by augmenting the special liquidity window to SIDBI for on-lending to MSMEs and by providing Banks with subsidised on-tap liquidity for on-lending to COVID intensive sectors,” she further noted.

Economists said a further downward revision in the RBI’s growth projection of 9.5 per cent for 2021-22 is possible while inflation may be higher than the estimated 5.1 per cent.

“The second wave of the pandemic, apart from immediate loss of economic activity, will likely also result in medium-term headwinds in recovery in business and consumer confidence. While the RBI has lowered their 2021-22 growth forecasts today by 1 percentage point, one feels further material downside to the same remains a possibility,” said Siddhartha Sanyal, Chief Economist and Head – Research, Bandhan Bank.

“We think a critical mass of the population will be vaccinated by December, and the rise in activity and demand will give producers the confidence to pass on higher input costs to consumers, putting upward pressure on core inflation,” said a note by HSBC Global Research.

However, as long as CPI inflation remains under 6%, we are not expecting a repo rate hike in the foreseeable future, or for as long as private investment remains subdued, it further said.

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‘Forex reserves may have crossed $600-billion mark’

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Our Bureau

India’s foreign exchange (FX) reserves may have vaulted over the $600 billion milestone in the week ended June 4, 2021.

The reserves jumped by $5.271 billion in the week ended May 28, 2021 to stand at $598.2 billion, as per the Reserve Bank of India’s latest weekly statistical supplement.

RBI Governor Shaktikanta Das underscored that emerging market economies have to build up their own buffers and India is no exception.

Das said: “After a risk-off period of retrenchment in April-May, the prospects for capital flows to India are improving again. While these flows ease external financing constraints, they also impart volatility to financial markets and asset prices, while producing undesirable and unintended fluctuations in liquidity that can vitiate the monetary policy stance.”

Das observed that this has necessitated countervailing two-sided interventions by the central bank in spot, forward and futures markets to stabilise financial market and liquidity conditions so that monetary policy retains its domestic orientation and the independence to pursue national objectives.

Spike in forward premia

Thus, RBI actively engages in both purchases and sales in the foreign exchange market and its various segments.

“The success of these efforts is reflected in the stability and orderliness in market conditions and in the exchange rate in spite of large global spillovers. In the process, strength is imparted to the country’s balance sheet by the accumulation of reserves,” Das emphasised.

To a question on why forward premia spiked earlier and in the last three days came crashing down, Michael D Patra, Deputy Governor, said the forward premia are essentially a market outcome.

“Last time when the forward premia spiked, it was because of foreign investment in an InvIT (Infrastructure Investment Trust)….So, we watch these outcomes and stand ready to take countervailing action….as and when necessary,” Patra said.

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Major concerns around cryptocurrency: RBI

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Days after it asked the banks not to cite an earlier to order to block cryptocurrency transactions, the Reserve Bank of India on Friday said that it has major concerns around cryptocurrency.

“RBI’s position is that we have major concerns around cryptocurrency, which we have conveyed to the government. But the central bank does not give investment advice. It is up to each investor to make their own appraisal and due diligence and take a very careful call on their own investments,” Shaktikanta Das, Governor, RBI, said at a press briefing.

“There is no change in RBI’s position. Our circular clarifies our position very well. The Supreme Court set aside RBI’s circular of 2018. But it came as a surprise that some banks were still citing that circular in their correspondence with customers. We had to set the record straight that that circular of RBI has been set aside and it is not correct to refer to it,” he explained.

In a fix

While banks have stopped warning customers against cryptocurrency transactions, investors are still not sure on the way forward.

Cryptocurrency investors do not expect to face problems in banking transactions after the notification by the Reserve Bank of India to ignore its directive post the Supreme Court ruling. While most banks said they will abide by the RBI directive, they are looking for more regulatory clarity.

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RBI opens ₹31,000-cr tap for MSMEs

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Even as it left the policy repo rate unchanged, the Reserve Bank of India decided to open the liquidity tap a bit more, this time aggregating ₹31,000 crore, to help MSMEs, especially those in contact-intensive sectors as Covid-19 second wave rages on.

The central bank decided to open an ‘On-tap Liquidity Window’ aggregating ₹15,000 crore till March 31, 2022 for sectors, including hotels and restaurants, tourism, and aviation ancillary services. Other services, including private bus operators, car repair services, car rentals, event/conference organisers, spa clinics and beauty parlours/salons will also benefit. All these services were badly impacted by the pandemic, the RBI’s latest Annual Report had acknowledged.

“We will continue to think and act out of the box, planning for the worst and hoping for the best. The measures announced today, in conjunction with other steps taken so far, are expected to reclaim the growth trajectory from which we have slid,” said RBI Governor Shaktikanta Das.

 

Banks can tap this window to get funds with tenors of up to three years at the repo rate (4 per cent) to provide fresh lending support to these contact-intensive sectors. By way of an incentive, banks will be permitted to park their surplus liquidity up to the size of the loan book created under this scheme with the RBI under the reverse repo window at a rate that is 40 basis points higher than the reverse repo rate (of 3.35 per cent).

Funds for SIDBI

The central bank will also extend a special liquidity facility of ₹16,000 crore to the Small Industries Development Bank of India (SIDBI) to support the funding requirements of MSMEs, particularly smaller units and other businesses including those in credit-deficient and aspirational districts.

SIDBI can tap this facility for on-lending/refinancing through novel models and structures. “This facility will be available at the prevailing policy repo rate for one year, which may be further extended depending on its usage,” Das said.

The Governor observed that to nurture the still nascent growth impulses and ensure continued flow of credit to the real economy, the RBI had announced fresh support of ₹50,000 crore on April 7 to All India Financial Institutions (AIFIs) for new lending in 2021-22. This included ₹15,000 crore to SIDBI.

Restructuring framework

The RBI decided to expand the coverage of borrowers under the Resolution Framework 2.0 by enhancing the maximum aggregate exposure threshold from ₹25 crore to ₹50 crore for MSMEs, non-MSME small businesses and loans to individuals for business purposes. This opens the Framework to a larger set of borrowers.

Recognising that the second wave could pose difficulties in loan servicing, the RBI had unveiled the Framework, which allows restructuring of loans taken by individuals, small businesses and MSMEs.

These measures, among a host of others, came even as the Monetary Policy Committee (MPC) stood pat on the policy repo rate.

By leaving the repo rate unchanged, the committee sought to strike a balance between the need to tamp down inflationary pressures being exerted by rising international commodity prices, especially of crude, and logistics costs, and support economic activity, currently hobbled by the adverse impact of the second wave.

All six MPC members unanimously voted to keep the policy repo rate at 4 per cent and continue with the accommodative stance. The repo rate has been static since May 2020.

Risk from rural spread

“Maintaining financial stability and congenial financing conditions for all stakeholders is a commitment that we have adhered to assiduously,” Das said.

“The sudden rise in Covid-19 infections and fatalities has impaired the nascent recovery that was underway, but has not snuffed it out. The impulses of growth are still alive,” he said. He cautioned that the increased spread of Covid to rural areas, however, poses downside risks to the growth outlook.

FY22 GDP growth lowered

The MPC cut the real GDP growth projection to 9.5 per cent in 2021-22 against its earlier forecast of 10.5 per cent. Retail inflation has been projected at 5.1 per cent during 2021-22 (against earlier projection of 5 per cent), with risks broadly balanced.

 

 

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‘Focus on growth will continue’

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The six-member monetary policy committee decided to maintain status quo on the policy repo rate to support growth, which has been laid low by the second Covid-19 wave , and to tackle inflationary pressures arising from rising global commodity prices, especially crude oil, and logistics costs.

RBI Governor Shaktikanta Das and Deputy Governors MK Jain, MD Patra, M Rajeshwar Rao, and T Rabi Sankar fielded questions from the media. Excerpts:

Why is RBI focussed only on supporting the 10-year benchmark Government Securities (G-Secs) in its market interventions?

Das: We focus on the entire yield curve, across maturities, and not just the 10-year G-Secs. Somehow there is a perception about the RBI being focussed only on 10-year G-Sec. For example, in the last G-SAP (G-Sec Acquisition Programme) auction, we had G-Secs across the maturity profile for purchase. The bond yields look inverted because there is abundant liquidity. So, naturally, the short-end (G-Secs) rates fall more than 10-year or 14-year rates. Therefore, the curve looks steep. But it is not so. If you look at the 10-year or the 14-year segments, the rates haven’t really gone up.

Whether 6 per cent yield on the 10-year G-Secs is sacrosanct, there is nothing like that. We have talked about an orderly evolution of the yield curve and we are focussed on that.

How will lower inflation print for April give you more elbow room?

Das: The inflation print for April at 4.3 per cent gives us elbow room. And elbow room means, it gives us space with regard to liquidity operations, enables us to step up liquidity infusion into the system.

With inflation being revised up, does it mean that policy normalisation will start?

Das: With regard to normalising the policy stance, there is no thinking at the moment. Our earlier CPI inflation projection was 5 per cent and now we have revised it to 5.1 per cent. This is not a significant upward revision.

What is your assessment of the impact of the second wave?

Das: Rural and urban demand was dented in the first wave. But the expectation is that the second wave has moderated (in terms of number of fresh cases)….Our assessment is that the impact of the second wave will be confined within the first quarter.…Our expectation is that from the second quarter, the overall demand position also will improve.

How long can you look through incipient inflationary pressures?

Patra: In several MPC statements, the analysis of inflation has been done. And the view of the MPC is that at this time the inflation is not persistent. It will turn persistent when it is backed by demand pull. At the current stage, we find the demand very weak and there is no demand pull in the inflation formation. It is mostly on the supply side and therefore we have chosen to look through. But we are very, very vigilant about demand pressures and we will keep on monitoring as and when demand pressures start feeding into the inflationary process.

How concerned are you about the pass through of WPI inflation into CPI?

Das: We are monitoring the the revival of growth — how growth is taking roots. We are monitoring the inflation dynamics…So, the MPC has consciously decided to focus on growth and give forward guidance in terms of the accommodative stance, spelling out what is meant by accommodative. So, the focus on growth will continue. The inflation, according to the MPC’s assessment, during the current year, is 5.1 per cent, which is well within the 2-6 per cent band.

Corporate loan book has not picked up and private capex revival has not started. What is your assessment and, based on the announcements today, is there no need for a stimulus package?

Das: We have not told banks to push credit. We discussed the credit flow in the earlier meeting…We have requested banks to implement the resolution framework. The RBI never tells banks to push credit. Credit flow depends on market demand and borrower profile and borrowing proposal. The dent on the economy is in the first quarter. From the second quarter, overall economic activity will pick up.

NPAs of banks will remain within the stress test of Financial Stability Report ?

Das: On NPAs, the projection (FSR said GNPA ratio may rise from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario; the ratio may escalate to 14.8 per cent under the severe stress scenario) we gave in the last FSR will be within that. The figures are manageable. We will spell out the details in the FSR.

Do you see a risk to the general government’s debt sustainability over the medium term?

Patra: Public debt will be about 90 per cent of GDP at the end of March 2022. Our assessment is based on the Domar condition of (public debt) sustainability, which requires that the growth rate of the economy should be higher than the interest rate at which the government services the debt, that condition is fulfilled as of now. The level of debt-to-GDP is set to decline over the next six years. So public debt is sustainable.

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