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RBI governor Shaktikanta Das
RBI governor Shaktikanta Das

RBI moves to unclog credit flow, quicken transmission

Central bank to pump in 1 tn, exempts banks from CRR norms for loans to certain segments

The Reserve Bank of India (RBI) on Thursday decided to make cheap money available to lenders, incentivise retail loans and provide a breather for loans to certain categories of builders, in its attempt to revive wilting credit growth.

The central bank’s efforts come amid a fall in credit growth to 7.14% in the fortnight ended 17 January compared to 7.51% in the previous fortnight.

The first measure will see the RBI pumping in 1 trillion into the banking system through long-term repo operations for one and three years. The exercise will begin from the fortnight of 15 February and, according to an RBI statement, is expected to “augment credit flows to productive sectors".

“It is an effort to ensure better monetary policy transmission because we are giving it at the policy rate. When they get cheaper funds, it will quicken the process of transmission," said Shaktikanta Das, governor, RBI.

According to deputy governor Michael Patra, the 1 trillion borrowed by banks under this special window will be locked in at the current repo rate of 5.15%. “If we change the policy rate and we undertake repos, at that time, then it will be a different rate, but this will be locked. So, banks get funds at 5.15%, whereas the average cost of funds taking into accounts deposits is much higher and they will return the money after three years at 5.15%," said Patra.

The second measure pertains to banks being exempted from the mandated cash reserve ratio (CRR) provision for loans extended to certain sectors between 1 February and 31 July. These would apply to retail loans for automobiles, residential housing and loans to small businesses, which is expected to raise credit to these sectors. CRR is currently at 4% of net demand and time liabilities (NDTL) or a sum of the bank’s deposits and borrowings. Banks must set aside CRR with RBI, but do not earn any interest on it. The lower the CRR requirement, the better it is for banks as they can deploy that much more and earn interest.

Experts sounded cautiously optimistic about the chances of a revival in demand, since the lack of it is also partly responsible for the slow pace of credit growth. Banking system already has a liquidity surplus of over 3 trillion and it is to be seen whether cheaper money helps spur credit demand.

Rajni Thakur, economist, RBL Bank, said that while the specific announcements in terms of CRR relief or long-term durable liquidity for banks aim to push overall credit availability, whether these steps manage to improve demand conditions is another question altogether. “Overall, however, RBI’s continued focus on easing credit flow in the economy will help the sentiments," she added.

The third measure brings relief to banks and real estate builders alike. The central bank said it will permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond promoters’ control, by another year. This extension, the RBI said, will not lead to downgrading of the asset classification. Through this, the RBI has allowed banks the leeway to not classify such loans as non-performing and save on provisions.

Projects financed by banks have a specified DCCO, and any delay in it and a consequent shift in repayment schedule is considered a debt recast. Banks need to set aside 15% of the outstanding loans for such loans as provisions, same as that for bad loans. At present, the RBI allows one-year extension in DCCO for non-infrastructure projects, including commercial real estate. Thursday’s announcement will add another year to it.

The RBI has always seen commercial real estate exposure of banks as a riskier affair compared to other segments. Hence, it has mandated banks to set aside more money as standard asset provisions between 0.75-1% for these loans. Typically, banks have to set aside 0.4% of a loan as provisions for most other loans.

“RBI’s decision to permit extension of date for commercial projects stuck for reasons beyond control of the developers under institutional debt will be instrumental in bringing much-needed relief to developers," said Jaxay Shah, chairman of CREDAI National, a developers’ lobby.

Meanwhile, the RBI’s monetary policy statement said that transmission across various money market segments and the private corporate bond market has been sizable.

Compared to the cumulative reduction in the repo rate by 135 bps since February 2019, transmission to various money and corporate debt market segments up to 31 January 2020, ranged from 146 basis points (overnight call money market) to 190 bps (3-month commercial papers of non-banking finance companies).

“Transmission through the longer end of government securities market was at 73 bps (5-year government securities) and 76 bps (10-year government securities)," it said. According to the central bank, transmission to the credit market is gradually improving and the one-year median marginal cost of funds-based lending rate (MCLR) declined 55 bps between February 2019 and January 2020. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 69 bps and the WALR on outstanding rupee loans fell 13 bps during February-December 2019.

With inputs from Bidya Sapam in Mumbai

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