No rate cut, but RBI trims rules, drops overlapping biz regulations in credit push

The central bank unwrapped a box of goodies to power credit and business on Wednesday, even as it delivered a better growth outlook and kept policy rates untouched.

The Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.5% for the second time in a row, while nudging up the GDP estimate for the year from 6.5% to 6.8%, citing the economy's resilience in the face of turbulence. The policy panel now sees inflation this year at 2.6% as against 3.1% earlier, thanks to the recent big-bang cuts in goods and services tax (GST).

Reserve Bank of India governor Sanjay Malhotra also hinted at the possibility of another rate cut in December, saying that falling inflation has "created space for rate cut". Even so, the MPC decided to maintain the status quo on rates due to global uncertainties and the lack of full transmission of past monetary measures. The RBI cut the policy repo rate by a total of 100 bps between February and June.

The RBI also floated a series of measures for better banking competitiveness, credit flow, ease of doing business, foreign exchange management, consumer satisfaction, and internationalization of the rupee.

“Apart from a dovish pivot, the RBI also undertook several credit standards easing, including lowering risk weights for lending for non-banking institutions and infrastructure sector, and also rationalized several measures for foreign exchange transactions,” BofA Securities said in a note. “This is largely aimed at reducing bottlenecks for lending, especially to the MSME sector, and also for giving greater flexibility for lending against financial assets. These measures will be generally welcomed, but their immediate impact on credit demand, remains to be seen,” it added.

The biggest relief for banks, especially the private ones, was the decision to drop an October 2024 plan that would have restricted them from having overlapping businesses with group companies. Potential beneficiaries include HDFC Bank, Axis Bank and ICICI Bank, who have non-bank subsidiaries and would have been forced to absorb or get rid of them. The BSE Bankex closed 1.44% higher on Wednesday, against the benchmark Sensex's 0.89% increase.

While the MPC members unanimously voted to keep the rates unchanged, they were divided on the committee's stance, with the two external members voting for a change in stance to 'accommodative', governor Malhotra said in a post-policy conference.

Malhotra said the removal of the word 'limited' from RBI's guidance in August reflects the improved economic conditions in terms of sustainably lower inflation and a strong growth trajectory. In August, the governor had said RBI has "limited space" for further rate cuts.

Lending push

The RBI also proposed to allow banks to finance acquisitions by Indian companies, and lend more against shares and units of REITs and InvITs. It also mooted removing the cap on lending against listed debt securities, and expanding bank finance for share purchases.

The central bank also proposed to drop its August 2016 guidelines on lending to large corporates with limits on exposure to securities issued by an individual company. In a post-policy conference, governor Malhotra allayed fears of concentration risk, given newer guidelines in place, and the significant drop in the share of corporate lending by banks since the norms were first issued.

“While the Large Exposures Framework, since put in place for banks, addresses concentration risk at an individual bank level, concentration risk at the banking system level, as and when considered as a risk, will be managed through specific macroprudential tools,” RBI said. Deputy governor Rajeshwar Rao said these could include measures such as a sector-wide or consortium cap on banks’ exposure to a single entity, if needed.

The RBI may also relax some of the restrictions on operating so-called transaction accounts—current accounts, cash credit accounts and overdraft accounts.

The measures were positive for non-bank lenders as well. RBI proposed lower risk weights on NBFC loans to operational projects under public-private partnerships, and a ‘principle-based framework’ for lending to this segment which would aim to align risk weights with risk characteristics of the projects. The RBI may also issues fresh licences for urban co-operative banks (UCBs), something it stopped in 2004 given the weaknesses in the segment.

The rate pause was expected, said Sudipta Roy, managing director and chief executive officer, L&T Finance. "However, the real action was contained in the various measures announced to improve the flow of credit in the economy,” Roy said, adding they were “aptly timed”, and will support aspirational growth levels.

However, HSBC Investment Research said in a note that while the slew of reforms to support credit growth and rationalization of certain regulatory limits will help in the short-to-medium term, single-digit nominal GDP growth could keep a lid on overall credit growth.

Ease of doing business

In January 2023, the central bank had proposed a new system in which banks would anticipate loan losses and keep aside funds for them in advance, in a departure from the current practice of making provisions after the default. In a relief for banks, RBI on Wednesday proposed to roll out the so-called expected credit loss (ECL) framework in a staggered manner, giving enough time for the transition. The apex bank also floated a standardized approach to calculate the amount to be set aside, in line with the Basel framework.

Another plus for NBFCs was a review of the external commercial borrowing (ECB) framework, removing curbs on the cost of borrowing and reviewing end-use restrictions, among others. The central bank has also begun consolidating its instructions into a set of master directions to provide ease of access and reduce compliance costs.

It will also look to strengthen the internal ombudsman mechanism in regulated entities, proposing that such board-appointed bodies be equipped with compensation powers and be allowed access to the complainant, aligning the role of IOs more closely with that of the RBI ombudsman. The scope of the RBI ombudsman scheme will be extended to state and district central co-operative banks, which now fall under Nabard supervision.

Internationationalizing rupee

The apex bank also pressed ahead to take the rupee global, allowing authorized dealer banks in India and their overseas branches to lend in rupees to residents in Bhutan, Nepal, and Sri Lanka, including a bank in these jurisdictions, in order to facilitate cross border trade transactions. “It is essential that INR liquidity is made available and accessible to residents of other countries,” RBI said.

The RBI also proposed including select currencies of India’s major trading partners in the list of reference rates published by Financial Benchmarks India Pvt. Ltd to deepen the onshore forex market. This is expected to encourage banks to quote directly in a larger set of currency pairs, and eliminate the need for multiple currency conversions, making trade more efficient.

Deputy governor T. Rabi Sankar said the RBI is considering a few currencies such as the Indonesian rupiah, but the list is yet to be finalized.

Other measures included extending the time period for repatriation for Indian exporters to process export proceeds, and raising the timeline for outlay of foreign exchange in merchant trade transactions. The aim is to encourage Indian exporters to open accounts with IFSC Banking Units, increase forex liquidity in IFSC, and help Indian merchants in completing business transactions efficiently. RBI also expanded the scope of investment of balances under special rupee vostro Accounts from only government securities to now corporate bonds and commercial papers.