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RBI kept repo rate unchanged; launches easy loan facility in MPC meeting

RBI

Reserve Bank of India held its Monetary Policy Committee meeting on Friday where interest rates were kept unchanged. This meeting came after its bi-monthly deliberations on Wednesday amid expectations of keeping a status quo on repo and reverse repo rates due to uncertainty over the impact of the second wave of Covid-19.

RBI kept the key policy interest rates unchanged once again at record low levels, ensuring that the bank loans do not get costlier and handed out special cheap loan facility to Covid-battered contact–intensive hospitality sector. The central bank also promised to be accommodative to the needs of the economy as the country continues to emerge from the second wave of Covid-19.

Also Read: Looking at the role of the Monetary Policy Committee during the pandemic induced lockdown

RBI has maintained the Repo rate at 4 percent while the reverse repo rate has been kept at 3.35 percent.  The central bank, however, trimmed down the economic growth forecast for the current fiscal 2021-22 to 9.5 percent from the earlier 10.5 percent. It projected the retail inflation to go up to 5.1 percent in the current year. RBI Governor, Shaktikant Das said that the dent on urban demand and spread of Covid19 in rural areas posed a downside risk to growth. He added that the recent fall in inflation provided enough elbow room for policy support from all sides required to regain growth momentum.

A normal monsoon would provide tailwind for economic revival, said RBI governor. To fight the impact of the pandemic’s second wave, the central bank extended a helping hand to small and medium industries and the vulnerable high contact intensive sectors.  It promised to provide easy loans of Rs 15,000 crore till March 2022 with tenor period up to three years at repo rate. Targeted beneficiaries of this “easy loan scheme” include hotels, restaurants, tourism, rent-a-car services, spa clinics, beauty parlours and saloons.

RBI also extended special liquidity facility of Rs 16,000 crore to SIDBI for on-lending and refinancing to small businesses. This is in addition to the Rs 50,000 crore already announced by the central bank in April to all Indian financial institutions (AIFIs) that included SIDBI too.
RBI governor said that retail inflation is likely to be 5.1 percent during the current fiscal. The central bank has fixed the upper and lower tolerance limits for retail inflation. MPC has been given the mandate to maintain annual inflation at 4 percent until March 31, 2026, with an upper tolerance of 6 percent and a lower tolerance of 2 percent.

Also Read: RBI seeks exemption of citizen’s ‘financial Data’ from the Data Protection Law

Comments by industry experts on RBI decision

Lincoln Bennet Rodrigues, founder and chairman, Bennet & Bernard Group commented, “A rate cut would have been beneficial for the consumers and would have given a boost to current demand uptick that we have seen recently. Residential demand is reviving in the pandemic context and this needs to be fostered. However, the prevailing home loan rates which are a record low are already enticing for homebuyers. For any investor, it is a time of great opportunity and for the end-customer, it is a good time to buy. Going forward, we would also like to see reduction in stamp duty & registration charges to push demand further in the real estate sector that forms the backbone of several other sectors. We urge the government to introduce measures that truly uplift the real estate sector which also contributes significantly to the country’s economic growth.”

Ramani Sastri, chairman and MD, Sterling Developers Pvt Ltd stated, “It also goes without saying that the real estate industry’s perennial hope is fixed on lower interest rates. Any further reduction of the repo rate would have aided in ensuring adequate flow of capital in the market. However, home loan interest rates have already gone down substantially in the recent past, and are presently at an all-time low. Homebuyers will continue to take advantage of the lowest ever home loan interest rates and with the emerging need, the demand for housing is going to sustain as it is a safe-haven asset and many fence-sitters will take the plunge and make the purchase once the situation normalizes. There was a major revival in the residential sector recently despite the pandemic last year. The second wave of the pandemic may have disrupted the recovery of the real estate sector to some extent but we expect a strong revival in the second half of this fiscal and the long-term outlook remains healthy. As the states are in the process of easing lockdowns, the real estate industry would need all-around support and quick assistance to pick up their business thread again.”

What is Repo rate ? What is SIDBI?

The rate at which commercial banks borrow money from RBI by using government bonds as collateral to achieve its fiscal goals is known as the Repo rate. ‘REPO’ refers to repurchase option or agreement, and it represents a monetary tool used by the RBI to allow commercial banks to borrow money, when in need, against collaterals such as government bonds and treasury bills. The rate charged by RBI from the commercial banks for borrowing is known as the repo rate.  The rate at which the central bank borrows from commercial banks is known as the reverse repo rate.

SIDBI, which stands for Small Industries Development Bank of India, is an independent financial institution aimed at aiding the growth and development of Micro, Small and Medium Enterprises (MSMEs) in the country. MSMEs contribute significantly to the national economy in terms of production, employment and exports. SIDBI has a mission of facilitating and strengthening the flow of credit to Micro, Small and Medium Enterprises and for addressing the developmental and financial gaps in the ecosystem of MSMEs

This financial institution is a statutory body set up under an act of the Indian Parliament in 1990, and aims at emerging as a single-window to meet the developmental and financial needs of MSMEs in order to make them globally competitive, strong, and vibrant.

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Supreme Court announces extension in the date for loan repayment moratorium

On Thursday afternoon, the Supreme Court had extended the moratorium for loan repayment. The extended date is September 28, 2020. Due to the non-payment of the installments at the time of the pandemic, the order remains functional, directing the banks not to declare any loan as a Non-Performing Asset (NPA).

On August 31, 2020, the former deadline of the loan repayment suspension had ended. The scheme had been introduced to help the borrowers cope up with the financial setback due to the Covid-19 crisis. As per this policy the borrowers had been spared from repaying their loan up to a period of 6 months.

Senior Advocate Rajeev Dutta queried that where exactly the relief for the borrowers is.  Loans are simply being restructured, which should have been done earlier. On top of it the compound interest is still being charged. He further added that lakhs of people were in hospitals for their sufferings; many people have lost their sources of income. He asserted that the Central Government should make their stand clear, decide on relief on the issue of the moratorium and waiving of interest on interest and others if it felt so.

The Reserve Bank of India and the Centre also informed the Supreme Court that the moratorium period is extendable by two years.

Solicitor General (SG) Tushar Mehta who appeared for the Centre and the RBI stated that the central bank and government are in the process of identifying the distressed sectors to vary benefits as per the Covid-19 impact of the hits that they have taken. This statement was made by him to a panel headed by Justice Ashok Bhushan. He also added that steps have been taken concerning the rapidly contracting economy and stressed sectors of the country.

Supreme Court had declared that the final decision will be made on Wednesday, September 11, 2020.  A group of petitions will be heard with aim at waiving interests on the suspended Equated Monthly Installments (EMIs) in the loan repayment moratorium time-period.

The Supreme Court had also stated that there is “no merit in charging interest on interest” for the exempted loan payment EMIs during the time of the Covid-19 pandemic.

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Stressed debts, huge write-offs for banks make it difficult to restructure loans: RBI

The report by the expert committee of the Reserve Bank of India (RBI) suggests that the pandemic has adversely affected some of the best companies. These companies and businesses were doing great before the pandemic hit. The experts have also stated that the banks should be more cautious in restructuring the loans after suffering from huge losses for their previous efforts in the same area.

As per the RBI report, “We think banks will be a lot more prudent towards restructuring in this cycle vs past restructuring cycles where ultimate slippages/write-offs were as high as 70-75% in the corporate segment.”

These enormous write-offs in the previous reconstructing efforts made by the banks, make them more risk-averse, which is not a good sign for the industry.

Rs. 15.5 lakh crore of debt is to be paid by 19 sectors that were not under debt before the pandemic, among which the retail and wholesale trade sectors are the most affected ones. They account for almost 5.4 lakh crore of debt.

The sectors that were already under debt have an added amount of 22.2 lakh crore to be laid off now. The Non-Banking Financial Companies (NBFCs) are the worst affected sector of this group that has a debt of 7.98 lakh crore.

The agriculture sector is the only one that has a debt of 9.8 lakh crore before and even after the pandemic. This sector did not face any stressed debt added to the existing one in the Indian economy.

Among the companies under stressed debt conditions, half of them are not eligible for restructuring the loans. As per a Nomura analysis, 30-50% of 5,179 companies across 25 sectors, do not meet the reconstructing criteria for loans.

Based on 5 major parameters, the Kamath Committee has described sector-specific ratios. These 5 parameters are – Depreciation and Amortization (EBITDA), Tax, Total debt to earnings before interest, debt service coverage ratio, and total outstanding liability to adjusted net worth.

Among 30-50% of those companies, Port and Services, Aviation, and Construction sectors are the top 3 companies that do not qualify the restructuring pattern.

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RBI revised priority sector lending guidelines

The Reserve Bank of India (RBI) has recently released revised priority sector lending guidelines with a purpose to augment funding to various segments including start-ups and agriculture. The RBI’s revision in PSL guidelines will incentivize credit flow to specific segments like clean energy, weaker sections, health infrastructure, and credit deficient geographies.

Revised priority sector lending (PSL) guidelines

  • Fresh categories eligible for finance under the priority sector are as follows:
    • Bank finance of up to ₹50 crores to start-ups,
    • Loans to farmers both for installation of solar power plants for solarisation of grid-connected agriculture pumps
    • Loans for setting up compressed biogas (CBG) plants 
  • More credit flow to districts with lower PSL
    • RBI has decided to rank districts on the basis of per capita credit flow to the priority sector and build an incentive framework for districts with a lower flow of credit and a disincentive framework for districts with a higher flow of priority sector credit.
    • Accordingly, from FY 2021-22 onwards, a higher weight (125 percent) would be assigned to the incremental priority sector credit in the identified districts where the per capita PSL is less than Rs 6,000.
    • On the other hand, lower weight (90 percent) would be assigned for incremental priority sector credit in the identified districts where the per capita PSL is more than Rs 25,000.
    • As many as 184 districts with low per capita PSL credit flow will benefit from the RBI move.
    • A higher credit flow to the rural sector is expected to boost rural spending at a time when GDP growth has contracted by 23.9 per cent in the June quarter.
  • Increment in the targets prescribed for small and marginal farmers, and weaker sections
    • The applicable target for lending to the non-corporate farmers for FY 2020-21 will be 12.14 per cent of the adjusted net bank credit or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE) whichever is higher.
    • All efforts should be made by banks to reach the level of 13.5 per cent of Adjusted Net Bank Credit (ANBC) (erstwhile target for direct lending to the agriculture sector)
    • Also, a higher credit limit has been specified for farmers producers organisations (FPOs) and farmers producers companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price.
    • Loans for these activities will be subject to an aggregate limit of Rs 2 crore per borrowing entity.
  • Doubling the loan limits for renewable energy:
    • The loan limits for renewable energy have been doubled. Commercial banks have also been instructed to adhere to the revised guidelines.
    • The bank loans up to a limit of Rs 30 crore to borrowers for purposes like solar-based and biomass-based power generators, windmills, micro-hydel plants, and non-conventional energy-based public utilities – such as street lighting systems and remote village electrification — will be eligible for priority sector classification.
    • Also, for individual households, the loan limit will be Rs 10 lakh per borrower.
  • Health infrastructure:
    • The RBI has doubled the credit limit for improvement of health infrastructure, including those under Ayushman Bharat.
    • Bank loans up to a limit of Rs 5 crore per borrower for
      • Setting up schools,
      • Drinking water facilities, and
      • Sanitation facilities including the construction and refurbishment of household toilets and water improvements at household level; and
    • Also, up to a limit of Rs 10 crore per borrower for building healthcare facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres, have been allowed.

Background

PSL was introduced with an objective to ensure access to credit, adequate flow of credit to employment intensive sectors like agriculture and MSME, especially for vulnerable sections of society. Priority Sector Lending Certificates (PSL-Cs) were introduced in 2016 to support comparative advantage of different banks in their respective areas of specialization.

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Centre comes for States’ rescue to bridge GST gap

On Thursday, the states have been offered with two option by the Centre to plug a shortfall in their Goods and Services Tax (GST) revenue, estimated at Rs 2.35 lakh crore in the financial year that ends in March 2021, amid the coronavirus disease (Covid-19) pandemic.

The centre gave one week to state to make a choice, triggering angry reactions from some Opposition-ruled states that said the decisions was thrust upon them.

A special window will be opened by the central government in consultation with the Reserve Bank of India (RBI), under which the states can borrow Rs 97,000 crore at a reasonable interest rate and pay-off the debt from the cess charged on luxury and sin goods such as liquor, cigarettes, aerated water and automobiles, after the GST regime completes five years of implementation in June 2022.

States have been offered with the second option as well. Under which states can borrow the entire Rs 2.35 lakh crore in consultation with the central bank. In some states, oppositions insisted that the Centre borrow the money instead and compensate the states for the shortfall.

“We told them that we will facilitate talking with RBI and help getting G security-linked interest rates so that each state does not have to struggle for loans,” finance minister Sitharaman said after a five-hour 41st meeting of the GST Council, which is headed by her and comprises state finance ministers.

“The states have requested us to lay down both options in detail, and give them seven full working days to deliberate on it and get back. A brief GST Council meeting may be held again,” she said. “Once the arrangement is agreed upon by GST Council, we can proceed fast and clear these dues and also take care of the rest of financial year.”

Sitharaman denied any general tax rate hike in the immediate future. The scot on luxury and sin goods will be extend beyond June 30, 2022, for at least another five years.

“Not considering any rate increases to make up for the shortfall in cess is a welcome measure; however, moving to a market borrowing mechanism which would extend the tenure of the cess beyond five years would worry businesses that are subject to the cess,” said MS Mani, partner at Deloitte India.

“Any decision to extend the cess beyond five years in order to fund the present compensation deficit could become a precedent; hence the period of extension of the cess should be minimal and predefined so that the cess does not become a permanent tax,” he said.

“While it is imperative to fund the compensation insufficiency of states, it is also essential to focus on the overall GST collection deficit confronting both the Centre and the states,” he added.

Under the Fiscal Responsibility and Management (FRBM) Act, States can exceed their borrowing limit by half a percentage point, is allowed to borrow more than the expected compensation from the Centre.

In May, borrowing limits for states had been raised from 3% of respective gross state domestic product (GSDP) to 5% that is helpful for them to get additional resources of Rs 4.28 lakh crore during the Covid-19 crisis.

The options communicated by Sitharaman will be available only for this financial year. In April 2021, the Council will review and decide action for the fifth year.

States have asked for seven working days to consider the detailed proposals. Another meeting of the Council may be held after that, said Mr. Pandey.

Ms. Sitharaman said there was no discussion on increasing tax rates during the meeting. She expressed gratitude that there was no attempt to politicise the issue within the Council, adding that “States behaved like statesmen”. However, outside the Council meeting, parties were politicising the issue, she said.

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RBI to transfer Rs 57,128 crore surplus to Union Govt to save economy

For the fiscal 20198-20, The Reserve Bank of India (RBI) will be transferring Rs 57,128 crore of its surplus to the Union government against Rs 1.76 trillion of transfer it did last year, the central bank said in a statement.

To bridge the fiscal deficit, the government had budgeted Rs 60,000 crore as dividend, but government officials had expected more from the RBI.

Economists, however, had expected the dividend transfer to be relatively muted this year and the transfer is largely in line with the expectations.

However, as per the economic capital framework (ECF) adopted by the RBI board last year, the contingency risk buffer, or realised equity, has to be maintained at 5.5-6.5 per cent of the balance sheet.

The RBI board determined to maintain the Buffer at 5.5 per cent.

In financial year 2018-19, Rs 1,23,414 crore of its surplus to the central government for the fiscal year 2018-19 or FY19 (July to June), and an additional Rs 52,637 crore of excess provisions as recommended by the Bimal Jalan committee on ECF. The surplus is commonly called ‘dividend’. In 2018-19, the RBI had transferred Rs 65,896 crore, in 2017-18 Rs 50,000 crore, while in 2016-17, the dividend transfer was just Rs 30,659 crore because of demonetisation.

July and June, is considered as financial year by The central bank, but from coming year, the financial year will get aligned with that of the government and will end in March.

On Friday, The central bank’s board met to review RBI’s balance sheet, the surplus transfer is part of that review process.

”Current economic situation has been reviewed by The board, continued global and domestic challenges and the monetary, regulatory and other measures taken by RBI to mitigate the economic impact of COVID-19 pandemic,” the RBI said in its statement. The board also discussed the proposal of setting up an Innovation Hub, as announced on the August 6 monetary policy review.

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Looking at the role of the Monetary Policy Committee during the pandemic induced lockdown

The current lockdown which is being undone in stages across India with different states taking independent approaches has affected the business, income, and the overall money flow in the economy. It has been observed, that India had disparate results during the lockdown from increasing difficulty in getting quality food items at a reasonable price on one hand to the majority of urban buyers going for luxury purchases on the other. In this context, the study and observation of the money flow and monetary policy takes the centre stage. India has a body to carry out these functions, functioning since 2016; Monetary Policy Committee, which had decided that it would meet five times this year keeping in mind the extraordinary situation being faced by the country.

In terms of managing the money flow in an economy, there are two clear cut actionable ways to do it- fiscal policy and monetary policy. The fiscal policy relates to the management of the taxation, revenue collection, and expenditure by the government and it is laid out in the deliberative assembly of the country or the parliament. The Monetary policy refers to the actions carried out by the central bank of the country (RBI in the case of India) in terms of bank rate, the repo rate, reverse rate, CRAR, open market operations, and others.

In the year 2016, inflation was gradually becoming an elephant in the room for the Indian public finance and the monetary policy wonks. As a result, the monetary policy committee was formed to fix the repo rate (benchmark policy rate) to bring the inflation under control. It was composed under section 45ZB of RBI Act 1934. The MPC is composed of six members. Out of the six, government nominates three with the rider that no government official would be nominated to the MPC. The other three would be from the Reserve Bank of India with the RBI governor being the chairperson (ex-officio). Deputy-governor of the RBI for monetary policy would also be one of the members in the monetary policy committee along with an RBI executive director. The monetary policy committee established as per the recommendations of the Urijit Patel committee has been under a lot of scrutiny to the extent of its need in the monetary policy architecture in India.

Some of the key areas in which the MPC is supposed to guide the government are the inflationary trends, the slowdown in growth and liquidity deficit. All of the three issues have deteriorated to such an extent in the last five months, that in a combined form they have taken the shape of a financial imbroglio. Deciding on the adjustments of the policy rates takes into account multiple factors, inflation being one of them. The reported headline inflation is composed of the food, fuel, and core inflation data. The ever rising fuel price and the costlier food basket are symptomatic of the fact that all is definitely not well with the crawling economy. This begs the obvious question as to what is the point of having five MPC meetings in a year instead of four.

The continuous rising price of fuel can also result in delineation of a new category of inflation data. During the beginning of the lockdown period in India, the data collection by the central statistics office was disrupted. This had been adjusted by data collection by telephone calls at designated places and purchases made by CSO staff on the ground. Subsequently, after this modified version of data collection, the calculation and representation of food inflation data at the wholesale and retail level in rural and urban sectors can give a varied idea as to whether the prices actually went up or down. But there has been a consensus that households have paid more for protein based foods, refined oil, pulses, lentils among others which on an overall basis pulls up the expenditure data from households in a condition where there has been minimal travel with people mostly staying indoors. This scenario in the food price also has a bearing on the overall flow of money in the market across and up the supply chains.

The above observation demands an obvious question from the people participating in the MPC meetings, have they incorporated the pinch felt by the public in terms of their daily purchases in their decision making. Monetary policy brings within itself the money flow in the entire economy, so household expenditures cannot be ignored.

Are members of the MPC aware of how this lockdown skewed the Gini coefficient of India? But it would be too naïve to say that the Gini coefficient gives a complete picture of the money and inequality in an economy under a specific duration of time. MPC would do an informed job if they bring into their decision making an observed phenomenon known as the Cantillon effect.  Proponents of this studied phenomenon argue that the last receivers of the new money in a system see the least increase in their purchasing power of their income with respect to the first receivers of new money (for e.g. the large industrialists). As per the time and placement of a person on a particular value chain, let it be of food, fuel, goods or services, the change in her/his purchasing power will vary. The monetary policy committee would do a better job if they bring in these perspectives in deciding on the various policy rates since the changes in the rates have different effects on different people in the economy. Otherwise having an extra monetary policy committee meeting this year will not bear any fruitful result.

This has been an exceptional year on many grounds at both the national and international levels. The committee formed under the aegis of the central bank of India-the RBi, is expected to bring in multilateral views and expertise while deciding on policy for such a large and diverse economy. It cannot become comfortable with a narrow one sided opinionated approach in dealing with the effects of the pandemic and the resultant lockdown on the Indian economy. The MPC should take care that the costs and benefits of any policy change should not have uneven distribution in the country which can be socially and economically disruptive.