Mumbai: As expected, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday unanimously voted to keep the policy repo rate unchan-ged even as predicting a higher inflation at 6.5 per cent in April-June quarter and a lower economic growth at six per cent in the next fiscal.
However, the central bank announced several regulatory measures to make funds cheaper for banks and borrowers, enable faster transmission of its past rate cuts to borrowers and incentivise the flow of credit to productive sectors of the economy.
In an attempt to boost credit flow, banks will be given a relief on cash reserve ratio (CRR) — a percentage of deposits that a bank has to hold in cash or with RBI — on incremental credit sanctioned for the purchase of automobiles and residential housing. The relief would also be available for loans sanction to MSMEs.
The move is expected to improve monetary transmission to crucial sectors like automobiles, real estate and MSME which are currently struggling due to NBFC crisis and slowdown in the economy.
The RBI has also given a one-time permission to the banks for restructuring of MSME loans. For commercial real estate projects facing genuine difficulties, the date of commencement of commercial operations has been extended by one year. This will allow the banks to continue showing these loans as standard assets on their books and therefore do not need to make provisions.
In a bid to lower interest rates for housing, auto, and micro small and medium enterprise (MSME) loans and push bank credit growth, the Reserve Bank of India (RBI) Thursday relaxed the requirements for banks to maintain the cash reserve ratio for these loans. The special dispensation will be for all bank credit to these sectors for a period of six months — between January 31 and July 31.
The central bank also extended External Benchmark Based Lending for better interest rate transmission to medium-sized enterprises. In September 2019, the RBI had mandated that banks would link all new floating rate personal or retail loans and floating rate loans to micro and small enterprises (MSEs) to an external benchmark effective October 1, 2019. Subsequently, most banks linked lending rates for housing, personal and MSEs to RBI’s repo rate. According to RBI, in the October-December 2019 quarter, the weighted average lending rate of domestic banks on fresh loans declined by 18 basis points for housing loans, 87 bps for vehicle loans and 23 bps for loans to MSMEs. Consequently, RBI has announced that beginning April 1, 2020, pricing of bank loans to the medium enterprises would also be linked to an external benchmark to further strengthen monetary transmission and reduce the borrowing costs of these enterprises.
Reflecting its concerns on the financial sector, the RBI announced multiple measures to improve monetary policy transmission and boost credit growth such as infusion of long-term liquidity. The RBI announced a new ECB-style long-term repo operations (LTRO) facility to give banks long-term liquidity by conducting term repos of one-year and three-year tenors of up to Rs 1 lakh crore at the policy rate. This will enable banks to fund at the repo rate at 5.15 per cent, below the existing deposit rates.
The central bank revamped the liquidity framework by dismantling quantitative ceilings for liquidity operations at the weighted average call rate versus one per cent of net demand and time liabilities; increasing scope to conduct longer-term variable rate repo/reverse repo operations exceeding 14 days and improving communications and transparency on liquidity operations.
The RBI eased guidelines on project loans to the commercial real estate sector by allowing a one-year extension on the date of commencement of project loans that have been delayed for reasons beyond the control of promoters, without attracting a downgrade of asset clarification. This brings them in line with other project loans in non-infrastructure space. The RBI will also be reviewing the regulations for housing finance companies, where it has recently taken over their supervision from the National Housing Bank.
The RBI extended the cut-off date for the one-time debt restructuring scheme for MSMEs which is meant for loans that were in default but “standard” as of January 1, 2019. This would help speed up monetary transmission, improve credit flow and help address the NPA problem to an extent.