Tag: RBI

‘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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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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RBI approves re-appointment of Vishwavir Ahuja as MD, RBL Bank

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The Reserve Bank of India has approved the appointment of Vishwavir Ahuja as the Managing Director and CEO of RBL Bank for a one-year period with effect from June 30, 2021.

“The re-appointment is subject to the approval of shareholders at the ensuing Annual General Meeting,” RBL Bank said in a regulatory filing on Friday.

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Will the proposed Bad Bank cure India’s banking sector? Here’s how it may shape up

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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 Nitin Jain

In Feb 2021, RBI announced a structure for a proposed bad bank, “What you call a bad bank is not really that; an ARC-type entity will be set up to take over bad loans from the books of public sector banks and it will try to resolve just like any other ARC,” RBI Governor Shatikanta Das had said.

Proposed Structure of Bad Bank

Though no formal structure has been announced yet, we understand basis news reports, that a National Asset Reconstruction Company Limited (NARCL) is going to be set up to take over NPAs from banks. The Promoters are likely to be power finance companies while the PSU banks will hold the remaining equity stake in the ARC. As per recent news reports, state-owned banks have shortlisted 28 loan accounts to be transferred to the NARCL with a total of Rs 82,500 crore of loans due, and further loans could also be transferred such that the AUM is over Rs 2 lakh crore. The list of borrowers includes big names such as Videocon Oil Ventures Limited (VOVL), Amtek Auto, Reliance Naval, Jaypee Infratech, Castex Technologies, GTL, Visa Steel, Wind World, Lavasa Corporation, Ruchi Worldwide, Consolidated Construction.

Normally the NPA loans at the time of takeover by an ARC are valued around 30-40% of the principal amount. However, as we understand from news sources, in the case of NARCL the loans may be acquired at the current book value. The NARCL would pay 15% in cash and the balance 85% in security receipts or any other proportion as they may decide. Further, the government would provide a guarantee to the security receipts issued by the bad bank. Let’s assume that a bank sells a loan of Rs 100 to NARCL. Now, if the Bank has already made 75% provisions for the loan, then the book value of this loan is Rs 25, and 15% of Rs 25  i.e. Rs 3.75 is cash to be paid to banks. Thus, using these assumptions, for taking over say Rs 2 lakh crore of bad loans, a cash outflow of Rs 7,500 crores and issuance of SRs worth Rs 42,500 crore may be required. (Please note that these assumptions have been taken for the purpose of explaining this concept only and are not indicative or confirmatory in any nature).

Pros and Cons of the Proposed Bad Bank Structure

Pros
-Cleans the balance sheet of the banks.
-Will provide immediate relief to the banking system which will now be facing fresh NPA on account of disruption due to Covid.
-Banks will become capitalized and ready for fresh lending.
-Faster decision making by one body (NARCL) v/s Consortium of banks.
-A secondary market can be created for the SRs which have a sovereign backing, that would provide further liquidity to the banks.

Con
The actual recovery of these loans may be lower than the book value of the loans transferred, thereby could lead to erosion of capital at NARCL over the medium and long term.
-If NARCL will need to take decisive, focused steps to recover these loans, otherwise the process may not be successful.
-The process entails transferring the bad loans at current date, and recovery or resolution to happen in future.
-May lead to aggressive fresh lending by Banks.

Taking control of management of these companies from the Promoters. The RBI had demonstrated effective management of DHFL, by taking over the board and appointing an administrator to manage the company and find a resolution.However, a Bad Bank, or even a network of bad banks, will not make the losses disappear. The losses, or non-performing loans, transferred to a bad bank will still exist. The process may allow better recovery of these loans in future. It will be important for the banks to review their lending policies and put in place a robust risk management system.  Further, it would be crucial to see how NARCL will manage these bad assets. I believe that one will require specialized expertise for recovery of these bad assets such as:

-Interim Crisis Management in these Companies – restructuring, reducing costs, identifying surplus assets and to sell these assets to generate liquidity, and providing transparent and clear communications to all stakeholders.
-Classification of bad loans by sector. The Government already has significant expertise in the Road/ Highways and Power Sector via its Undertakings. However, expertise may need to be built in other sectors via sector experts to facilitate day-to-day management of the operations of the company and to find a viable resolution to preserve value.
-Provisioning policies of NARCL will need to be reviewed such that they are in accordance with the tenor/ maturity of the SRs issued.
-NARCL will need to take a decision as to the route to be taken for recovery from the bad loan. Some potential routes could be: 

    1. Initiating corporate insolvency process on the Company
    2. Engaging an investment banker to pursue mergers and acquisitions transaction for the said asset.
    3. Undertake a compromise or settlement u/s 230 of Companies Act.

Though the ‘Bad Bank’ appears to be a sweet pill for the banking sector to get rid of their immediate problems, it would be a tough task ahead for the proposed NARCL to preserve the tax- payers’ monies over the medium and longer term.

(Nitin Jain is a veteran corporate and investment banker having worked in banks like Standard Chartered Bank and Bank of America. He is a Restructuring Expert and is also an Insolvency Professional registered with IBBI. The views expressed in the above article are the author’s personal views.)

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Under G-SAP, RBI to purchase ₹1.20 lakh cr worth G-Secs in Q2

Banking & Finance

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The Reserve Bank of India (RBI) has decided to purchase Government Securities (G-Sec) aggregating ₹1.20 lakh crore in the second quarter (July-September) of FY22 under its G-Sec Acquisition Programme or G-SAP 2.0.

Under G-SAP 2.0, RBI will be purchasing G-Secs aggregating ₹20,000 crore more than under G-SAP 1.0.

The third and last tranche of open market purchase of G-Secs aggregating ₹40,000 crore under G-SAP 1.0 will be held on June 17, 2021. Of this, ₹10,000 crore would constitute a purchase of state development loans (SDLs).

Under the programme, RBI commits upfront to a specific amount of open market purchases of G-Secs to enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.

The endeavour is to ensure congenial financial conditions for the recovery to gain traction.

 

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RBI, BFSI News, ET BFSI

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Bulk payment system, National Automated Clearing House (NACH) will be operational all days of the week effective from August 1, 2021. NACH is operated by NPCI and facilitates one-to-many credit transfer such as payment of dividend, interest, salary and pension.

RBI said, “NACH has emerged as a popular and prominent digital mode of direct benefit transfer (DBT) to large number of beneficiaries. This has helped transfer of government subsidies during the present COVID-19 in a timely and transparent manner. NACH is currently available only on the days when banks are functional. In the interest of customer convenience, and to take advantage of the availability of RTGS on all days of the year, it is proposed to make available NACH on all days of the week throughout the year, effective August 1, 2021.”

NACH has enabled large scale direct benefit transfer programmes of several government schemes to a large number of beneficiaries and helped government transfer subsidies during the Covid-19 pandemic.

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Bank NPAs may be contained within earlier FSR numbers, says RBI governor, BFSI News, ET BFSI

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The Reserve Bank of India sees the non-performing assets of banks remaining within the projections of the financial stability report (FSR) given out in January.

“On NPA position our expectation is that whatever projection we have given in the last FSR, it will be within that. At the end of the March it looks the figures are quite manageable,” RBI Governor Shaktikanta Das told reporters after the Monetary Policy.

“I would not say anything beyond that because the numbers are coming in and our teams are assessing and we will spell out the details in the financial stability report,” he said.

Stable capital position

He said a large number of banks, both in public and private sectors, have raised additional capital from the market through out last year.

“I have mentioned in my statement the need to build up provisioning and capital buffers. so that is the message we are giving to banks and NBFCs that they need to augment their capital because there could be some stress arising out of the second wave. That is still an assessment.”

The overall capital position of the banks both in the public and private sector is at very stable levels and they are meeting the regulatory requirements, with some being even much higher.

Financial stability report

Banks’ gross non-performing assets may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario, according to the Financial Stability Report (FSR) released by RBI in January this year.

If the macroeconomic environment worsens into a severe stress scenario, the GNPA ratio may escalate to 14.8%, the report had said.

“The stress tests indicate that the GNPA ratio of all scheduled commercial banks (SCBs) may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario,” the FSR report added.

Among the bank groups, public sector banks’ (PSBs) GNPA ratio of 9.7% in September 2020 may rise to 16.2% by September 2021 under the baseline scenario, it noted.

The gross non-performing asset (GNPA) ratio of private sector banks (PVBs) and foreign banks (FBs) may increase from 4.6% and 2.5% to 7.9% and 5.4%, respectively, over the same period.

In the severe stress scenario, the GNPA ratios of PSBs, PVBs and FBs may rise to 17.6%, 8.8% and 6.5%, respectively, by September 2021, the report said.



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