States will need years to recover from 'scissor effect' of Covid: RBI

 States are witnessing “unprecedented pressures” on their fiscal positions after the Covid-19 pandemic and the next few years are going to be challenging for most of them, according to a report on state finances by the Reserve Bank of India (RBI).

A possible ‘scissor effect’ - loss of revenues due to demand slowdown, coupled with higher expenditure associated with the pandemic, may push the states to great strife, the report warned.

"The debilitating combination of compression in tax receipts and ramped-up expenditures has generated unprecedented pressures on fiscal positions at sub-national levels," the report, released on Tuesday said, adding, the “quality of spending and the credibility of state budgets will assume critical importance.”

The report studied the state budgets, most of which were presented before the pandemic struck. But the RBI added its own analysis on what the states can expect going forward after they are done with their fight against the pandemic.

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For example, states that presented their budget before the pandemic had penciled in an average gross fiscal deficit (GFD) of 2.4 per cent of gross state domestic product (GSDP). However, the states that presented their budgets after the lockdown showed the deficit at an average of 4.6 per cent of GSDP, according to the report. On a consolidated basis, the deficit was coming at 2.8 per cent of the consolidated GDP.

“Thus, from the financing side, states’ combined GFD-GDP ratio is likely to remain around 4 per cent with a bias tilted to the upside, higher than the budgeted 2.8 per cent of GDP, albeit with state-wise variations," the RBI report estimated.

For 2020-21, more than half of the states had budgeted for revenue surpluses. But the Covid-19 crisis is likely to undermine fiscal targets and associated receipts for 2020-21.

“The duration of stress on state finances will likely be contingent upon factors like tenure of lockdown and risks of renewed waves of infections, all of which make traditional backward-looking tax buoyancy forecasting models unreliable,” it said.

The states will likely cut costs on water supply and sanitation, rural and urban development, spending on energy and transport, even as they budgeted higher spending on education. Although states generally receive and spend about one fifth of their budgeted allocations during the first quarter each year, they have maintained their spending at previous years’ levels in 2020-21, despite receiving only one-eighth of their budgeted revenues, the report noted.

The revenue impact on states will come mainly from taxes on commodities and services. Stamp duties, which are a major source of revenue under states’ direct taxes, will likely witness a shortfall because of contraction in construction activity, reverse migration of labourers and social distancing norms.

Extension of deadlines for payment of taxes to provide relief to businesses and citizens may further exacerbate the already worsening revenue situation of states.

State GST plummeted by 47.2 per cent during the first quarter of 2020-21 - sharper than the overall GST decline – but in the second quarter ended September, the decline moderated to 6.4 per cent.

Central tax transfers to states could also witness a fall by a significant margin.

Of the total revenue receipts of states, central tax transfers comprise 25 to 29 per cent, while own tax revenues have a share of 45 to 50 per cent. But it is “highly likely” that there would be a large shortfall in the divisible pool in 2020-21, the report said.

To garner some additional revenues, 22 states and union territories hiked their duties on petrol and diesel, while 25 states and UTs hiked duties on alcohol.

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However, revenue receipts are likely to be cushioned by revenue deficit grants, which compensate for deficits that prevail even after devolution, and the GST compensation cess. The share of grants is particularly high for special category states, mainly due to higher revenue deficit grants. The revenue deficit grants in 2020-21 are, in fact, more than double the average of the previous few years.

“On the whole, states’ fiscal response to Covid-19 should reflect in a larger increase in revenue expenditure in 2020-21 than budgeted. These spendings coupled with revenue receipts shortfall are likely to convert revenue surpluses as budgeted in 2020-21 into large deficits," the report observed.

To make good their deficits, the states are increasingly borrowing from the markets. From about half of their consolidated fiscal deficits till 2016-17, the share of market borrowings has increased to about 90 per cent in 2020-21. Part of the reason for such higher borrowing is rising redemption pressure, which will more than double from 2026 onwards.

The report praised states like Odisha and Haryana for being pragmatic in trying to meet their higher fiscal deficits by “using their own rainy funds without recourse to higher permissible market borrowings.” But there are states “like Gujarat and Punjab which have over-borrowed despite consolidation, with Uttar Pradesh being an extreme case - it has borrowed above 20 per cent of the budgeted amount, despite registering a fiscal surplus as against a budgeted deficit in 2019-20.”

States that are at the frontline of the battles against Covid will witness their fiscal arithmetic for 2020-21 suffering the most.

“While the focus during the first few months of 2020-21 has been on managing the health crisis, it is the regional and spatial dimensions of structural features like demography, health care systems, migrant workers, digitisation and strength of the third tier which are likely to play an important role going forward in determining the fuller macroeconomic impact of the pandemic on state finances,” the RBI report said.

RBI to conduct first OMO for state bonds worth Rs 10,000 cr on Oct 22

 Reserve Bank of India (RBI) will conduct first Open Market Operations (OMOs) to buy State Developments Loans (SDLs) aggregating Rs 10,000 crore through auction on October 22, 2020 to improve liquidity and pricing for these bonds.

The size may be enhanced in the subsequent auctions, depending on market response, RBI said in the statement.

On October 9, RBI had announced intent in the Statement on Developmental and Regulatory Policies OMOs to purchase state government bonds.

The central bank said it will buy bonds maturing between January 2029 and March 2031. It is offering to purchase bonds issued by 15 states including Assam, Bihar, Gujarat, Jammu & Kashmir, Kerala, Madhya Pradesh and Maharashtra.

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At present, SDLs are eligible collateral for Liquidity Adjustment Facility (LAF) along with T-bills, dated government securities and oil bonds.

On October 9, RBI had said it would conduct OMOs in SDLs as a special case during the current financial year. The OMOs would be conducted for a basket of SDLs comprising securities issued by states.

Only standard loan accounts as of March 1 eligible for recast: RBI

 

The Reserve Bank of India (RBI) has clarified that loans which have remained standard without any defaults as of March 1, 2020, will be eligible for restructuring under the pandemic-related resolution framework issued in August.

In clarifications issued late last night to borrowers as well as lenders about the August 6 circular, RBI said a loan account that was due for more than 30 days as on March 1, 2020, but subsequently got regularised, will not be ineligible for resolution under the COVID-19 resolution framework.

This is because the restructuring framework is applicable only for eligible borrowers who were classified as standard as of March 1, 2020.

However, such accounts may still be resolved under the prudential framework dated June 7, 2019, the central bank said.

Similarly, the regulator said restructuring of under-implementation project loans involving deferment of date of commencement of operations (DCCO) are excluded from the scope of resolution framework and that such accounts will continue to be governed by the February 7, 2020, and the other relevant instructions as applicable to specific category of lending institutions.

Also, in case of multiple lenders to a single borrower whose resolution is undertaken, all lending institutions will have to enter into an inter-creditor agreement.

On whether loans of Rs 100 crore and above will require an independent credit evaluation by any one credit rating agency, the apex bank said, in case credit opinion is obtained from more than one rating agency, all such credit opinions must be RP4 rating or above.

The clarification also said the new definition of micro, small and medium enterprises (MSMEs) effective June 26, will not impact their eligibility for resolution but will be based on the definition that existed as of March 1, 2020.

It also clarified that any company from any sector is eligible for resolution subject, except those exclusions prescribed in paragraph 2 of the annex to the August 6 circular and also those sector-specific thresholds not specified in the circular dated September 7. But lenders shall make their own internal assessments regarding eligibility.

Loans against property will also be eligible for recast if they don't fall under the personal loan category.

The quantum of the loan eligible for recast depends on the outstanding as on the date of invocation, which is March 1, 2020, provided it was a standard account then.

It has also been clarified that all farm credit exposures, including non-banking financial institution (NBFCs), can be recast under this scheme, but loans to allied activities such as dairy, fisheries, animal husbandry, poultry, bee-keeping and sericulture are excluded from the scope of the resolution framework.

But loans given to farmer households are eligible for resolution if they are not under other exclusion conditions listed in the framework.

On the loans to the realty sector, RBI said the requirement of inter-creditor agreement is a basic feature of the prudential framework for resolution issued on June 7, 2019, and consequently that of the pandemic resolution framework as well.

However, RBI said there is sufficient flexibility to the lenders to formulate such pacts in respect of a legal entity to which they have exposure that address the specific requirements of each borrowers on a case-to-case basis, including designing different resolution approaches for different projects under the same borrower within an pact.

For borrowers not eligible for resolution under the circular dated August 6, 2020, all the extant instructions shall still be in force. However, if any entity is otherwise eligible to be resolved under the new resolution framework, only this framework can be used for resolving the stress arising out of the pandemic.

All microfinance institution/self-help group loans meeting the basic eligibility criteria, unless covered by the specific exclusions, are eligible resolution but personal loans from these categories will not be recast.

Similarly investment exposures that are credit substitutes like corporate bonds and commercial papers are also eligible for resolution, the RBI said.

On whether the list of financial parameters prescribed by the expert committee and notified by RBI on September 7, 2020, are applicable only to borrowers having exposure of over Rs 1,500 crore, it said the September 7 instructions are applicable to all borrowers whose resolution is being undertaken as per the August 6, 2020, on resolution framework, the RBI said.

Set aside order on NPA classification freeze: RBI to Supreme Court

 

The Reserve Bank of India (RBI) has asked the Supreme Court to set aside its order on declaring accounts as non-performing assets temporarily as it will undermine its regulatory powers, while submitting that the regulator cannot address structural problems of the real estate sector that has sought additional relief.

The central bank also told the apex court that primary concern of the petitioners, who have asked for relief on payment of interest during the six-month moratorium period (from March-August), have been addressed through the Central government’s proposal to foot the compound interest sum of small borrowers.

“It is humbly submitted that this court had given an across the board stay on classification of any account as NPA (non-performing asset) till further orders. If the stay is not lifted immediately, it shall have huge implications for the banking system, apart from undermining the regulatory mandate of the RBI,” an affidavit submitted by the RBI on Friday stated.

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The RBI informed the court that the regulator had been “most proactive” in accounting a series of measures to mitigate the impact of the Covid-19, stressing that it has led to liquidity to the tune of Rs 11.1 trillion or 5.5 per cent of the gross domestic product, along with ensuring lower borrowing costs which resulted in issuance of corporate bonds worth Rs 3.2 trillion in the first half of this fiscal year.

While rejecting any further relief measures from petitioners, belonging to various industries, the RBI said it took “a balanced view, taking into account the interest of the depositors, borrowers, real sector entities and banks”, along with keeping in mind “financial stability and economic growth of the country.”

The regulator was of the view that any waiver of interest on interest, or compounding, will lead to “significant economic costs which cannot be absorbed by the banks without serious dent of their financials” and the government’s decision to bear the compounding interest cost for all loans up to Rs 2 crore “has addressed the primary prayers of the petitioners.”

It defended its move to provide leeway to banks to use its discretion on the eligibility of customers for loan repayment moratorium, along with other related terms, saying they were best placed to take a decision in the manner owing to different customer profile and business models of each banks.

The RBI was not in favour of extending the moratorium, imposed in March 2020, beyond August 2020 as it was not in the interest of borrowers, too. “It may not be sufficient in addressing deeper cash flow problems of the borrowers and in fact exacerbate the repayment pressures for the borrowers. Therefore, a more durable solution was needed to rebalance the debt burden of viable borrowers, both businesses as well as individuals, relative to their cash flow generation abilities,” the RBI said.

On the plea of sectors such as real estate, which have submitted to the court that enough measures have not been taken to safeguard their interest during the pandemic, the RBI said that some sectors including real estate and power were already stressed even before the outbreak of Covid-19 due to specific problems.

“Real estate sector has undergone structural changes in the recent past and is also facing a demand problem as evident from the high levels of unsold inventories and stalled projects…Nonetheless, it is submitted that the travails of real sector cannot be solved through banking regulations. The banking regulations of RBI cannot substitute addressing of structural problems of the real sector,” the affidavit read.

The RBI prayed to the court to not consider relief sought by petitioners in the light of its submission.

The Supreme Court had earlier this week asked the Centre and the Reserve Bank of India to place on record the KV Kamath committee recommendations on Covid-19-related debt restructuring, along with asking them to consider the relief sought by the real estate and power sectors.

The SC is hearing a petition filed by an Agra resident Gajendra Sharma that demanded a waiver of interest charged by banks on the instalments that have been deferred for repayment by the Reserve Bank of India (RBI) through a six-month moratorium imposed in March. A number of industrial bodies have joined the cause with the original petition demanding waiver of interest, or waiver of interest on interest on the suspended monthly instalments during moratorium period.

The Central government submitted an affidavit in the SC last week that it is ready to bear the burden of waiving compound interest for small borrowers. Any individual or entity whose loan amount is less than Rs 2 crore, irrespective of whether they have availed loan repayment moratorium or not, will be eligible for waiver of the compounding of interest, it said. This includes micro small and medium enterprises, education, housing, consumer durable, credit card, automobile, personal, and consumption loans.

RBI increases overdraft period of states, UTs until September 30

To provide greater flexibility to state governments to tide over cash flow mismatches, the Reserve Bank of India (RBI) on Tuesday increased the number of days for which a state or a Union Territory (UT) can be in overdraft at a stretch to 21 working days from 14 at present.

The number of days for which a state or UT can be in overdraft in a quarter has been increased to 50 working days from the current stipulation of 36 working days, the RBI said.

The arrangement will remain valid till September 30, the RBI said in a statement.

Rush hour and tougher questions ahead for both Mint Road and banks

“We must always remember that tough times never last; only tough people and tough institutions do,” said Reserve Bank of India (RBI) Governor Shaktikanta Das, when he announced a raft of measures to tackle the fallout of coronavirus (Covid-19) on the economy. It was a signal the days ahead will stretch both banks and Mint Road; so be prepared. Are we?

The asset quality of banks and the demands on their capital position due to its further deterioration must rank among the top concerns. The central bank has moved on the double to put in place a three-month moratorium on the servicing of term loans. But there has been no relook at income recognition and asset classification norms, the status of additional provisioning under the central bank’s June 7 circular, and the road ahead under the Insolvency and Bankruptcy Code (IBC) in these stressful times.

Says Divyanshu Pandey, Partner at J Sagar Associates, “There is good reason to give a three-month break for the timelines under the June 7 circular. An idea has been floated that the IBC process itself may be suspended for six months. A like thought process may be good for the June 7 circular as well.”

The merger of four sets of state-run banks, effective April 1, has led to a reset of a quarter of the banking system’s assets, and there is nothing to suggest that these entities will not require fresh capital down the line – and we have a handle on only their pre-Covid asset quality as on date. This holds true for private banks as well and may call for a rethink of their current capital structures.

Chart

Notes Nikhil Shah, managing director, Alvarez & Marsal (India): “The Budget has not provided capital for state-run banks given the significant recapitalisation of over $30 billion provided between FY17 and FY19. Most businesses have been severely impacted operationally and financially, and those that were overleveraged or had liquidity constrained prior to the crisis, will have the most difficult time.”

“My biggest worry is that the measures announced so far, commendable as they are (from a borrower’s point of view), come with their share of operational difficulties,” says a banker. Another lender, less charitable, is of the view that “it would have been better if the RBI had called for a videoconferencing of banks’ chief executives so that some of the ground-level operational issues could have been handled better.”

You have far too many moving parts.

The nuts and bolts

It has been gathered on good authority that it had been conveyed to the central bank that the insistence that the three-month breather “shall be contingent on lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from Covid-19,” will not fly. Borrowers, especially micro, small- and medium-enterprises (MSMEs) service the interest part just in time before the 90-day non-performing asset (NPA) norm kicks in. It is in the nature of the business as payment cycles are lumpy to begin with. This is the case even for term-loans structured as equated monthly instalments at the time of extending the facility. Many borrowers who had genuinely intended to square their limits with banks by the close of FY20 are simply not in a position to do so because of the disruption during the month.

“To say that you should be able to pin-point stress to Covid-19 is not practical. The RBI could have simply said the account should have been ‘standard’ – that it is not an NPA, rather than insist it should have been ‘regular’ at all times, suggests a banker.

Banks, on their part, are being inundated by all kinds of requests and clarification from borrowers — big and small. Can it be creatively ensured that they are not treated as dud accounts, by sanctioning a fresh limit? Some queries on forbearance are far too complex for them to answer.

The Securities and Exchange Board of India (Sebi) has allowed credit rating agencies (CRAs) to relax temporarily their norms for recognition of default on rated instruments. This is to be applicable to all rated instruments, including term and working capital loans, debentures, fixed deposits, and commercial papers (CPs). Says Subodh Rai, Senior Director at CRISIL Ratings: “The move by Sebi and RBI will ease the operational challenge faced by borrowers in the immediate term. CRISIL will factor the moratorium, if any, subject to the relevant bank’s policy and investor’s inclination to allow moratorium.”

But here is the tricky NPA classification bit, and it has nothing to do with the mere non-recognition of defaults by CRAs. If there is to be a default in the servicing of interest on debentures or money market instruments, will it mean that the term loans of the borrower are not to get a moratorium? Take a situation wherein a default on these instruments of a borrower had already happened say, in the month of February. If the term loans are to get a moratorium after all, what if the borrower were to divert funds to service the interest on debentures or CPs? This has implications for mutual funds, and also non-banking financial companies which are heavily dependent on bank lines for their funding.

“Debenture interest payments are not to be treated like term loans when it comes to its servicing. It brings its own share of challenges,” notes Pandey. These aspects require greater clarity from the authorities, and calls for closer co-ordination between the central bank, Sebi and the Pension Fund Regulatory and Development Authority.

Now join the dots: the message that comes across is “we started well, but it could have been better”. You simply can’t have more of the same.

That said, Covid-19 will be leveraged to lobby for all manners of forbearance, and the sins of the past may well be forgotten. The central bank, in its Financial Stability Report of June 2013, quoted Edward J Kane to drive home a point: “Bankers understand the financial safety net as a politically enforceable implicit contract that they have negotiated with their national governments”. And “lobbyists create a taxpayer ‘put’ by creating an excessive fear in the minds of regulators for letting banks’ accounting decisions or health be called into question.” Do mull it over; it’s worth the grind.

RBI relaxes overdraft facility norms for states, UTs until September 30

The Reserve Bank of India (RBI) on Tuesday relaxed rules for states to avail overdraft facilities until September 30, helping cashflow as India enters the the third week of a 21-day lockdown to prevent the spread of the coronavirus.

In a circular, the central bank said it has permitted "greater space" to state governments/ Union Territories for availing overdraft facilities and has also increased the number of days for which a state can be in overdraft.

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The number of days for which a State/ UT can be in overdraft continuously has been increased to 21 working days from the current stipulation of 14 working days.

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Similarly, the number of days for which a State/ UT can be in overdraft in a quarter has been increased to 50 working days from the current 36 working days.

Earlier, the RBI extended the realisation period of exports proceeds from nine months to 15 months for exports made up to or on July 31, 2020. It has also constituted an advisory committee under the chairmanship of Sudhir Shrivastava to review the ways and means limits for states and Union territories.

For now, the ways and means limit has been increased by 30 per cent for the states and union territories to deal with the situation. This new limit came into force on April 1, 2020 and will stay till September 30, 2020.

On Monday, Business Standard has learnt that Centre has allowed states to avail of up to 50 per cent of their 2020-21 (FY21) borrowing requirements in April itself.

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The move became imperative because of the Centre’s resource crunch owing to dwindling revenues and the resultant inability to pay all of the dues of the states under various heads.

A nationwide lockdown has been implemented till April 14 which has adversely impacted economic activities and governments have started diverting their resources to deal with the pandemic.

Covid-19 relief: Staggered 180-day bad-loan breather on cards for banks

The Reserve Bank of India (RBI) and the finance ministry may take up the issue of relaxation in the delinquency period for the classification of banks’ non-performing assets (NPAs) to 180 days, from the current 90 days.

The rescheduling of accounts classified as overdue, stressed or NPAs as on December 2019 without being downgraded, and fresh funding (with a minimum repayment period of 18 to 24 months) is to be considered. This may include going easy on the insistence for additional collateral as a pre-condition by banks.

The NPA delinquency relaxation to 180 days “may be heavily qualified to prevent its abuse”, said a source. The staggered NPA relaxation glide path can be expected to have ‘start-stop dates’, which will finally settle down to the current 90-day timeline by the close of 2020-21.

The interest accrued, but not received after January 1, 2020, may be allowed to be repaid in six monthly instalments from October 1 to end-March 2021. This ties in with the possibility of the delinquency period for classification of NPAs being extended to 180 days.

A key concern is that the three-month moratorium on term loans by the central bank, and its linkage to the account being ‘regular’ to avail of the same, may lead to a situation wherein weaker borrowers come under even more stress.

“These borrowers may default and get downgraded as NPAs under the current norms due to their inability to service the interest component on which there is no breather,” said a source.

“This is especially since sales in the June 2020 quarter will be extremely poor. Their ability to get fresh financing will also be under a cloud,” he added.

The amount that banks can avail of by way of refinance from the National Bank for Agriculture and Rural Development, National Housing Bank, and the Small Industries Development Bank of India is also to be looked at. A reference may be made to International Accounting Standard 10 pertaining to ‘events after the reporting period’. Its applicability to the Indian context is said to have been examined. Receipts, payments, recoveries, or provisions made or received up to September 30, 2020, could be considered while finalising the accounts for 2019-20 (FY20). Or an additional six months will be captured in banks’ accounts for FY20. It has been gathered that ‘talks with the Institute of Chartered Accountants of India (ICAI) have been initiated on this aspect’.

The additional provisioning norm under the central bank’s June 7 circular and incorporation of a three-month breather in its key trigger points may also be warranted. The additional provisioning banks have to comply with under the June 7 circular is as follows — 20 per cent after 180 days from end of the review period; and 15 per cent after a year; or a total additional provisioning of 35 per cent.

It was given to understand that the central bank’s insistence that the three-month moratorium ‘shall be contingent on lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from Covid-19’, has been flagged off to both its senior decision-making levels and to North Block. Borrowers, especially micro, small and medium enterprises, service the interest just in time before the 90-day NPA norm kicks in. It was suggested to the RBI that it could have said the account should have been ‘standard’ — that is, it is not an NPA or a special mention account — rather than insist it should be ‘regular’.

RBI increases WMA limit of states, UTs by 30%, relaxes export rules

The Reserve Bank of India (RBI) has decided to increase the Ways and Means Advances (WMA) limit for state governments and union territories by 30 per cent till September 30, and allowed exporters six months extra to realise their export-proceeds, as measures for dealing with the coronavirus-led slowdown.

The central bank also said banks don’t need to activate countercyclical capital buffers (CCyB) for one more year, which means the banks can utilize the capital earmarked for the buffer.

WMA is a temporary liquidity arrangement with the central bank, which enables the centre and the states to borrow money up to 90 days from the RBI to tide over their liquidity mismatch. On Tuesday, The RBI also increased the WMA for the centre to Rs 1.2 trillion for the first half, up from Rs 75,000 crore in the first half last year, and Rs 35,000 crore for the second half of 2019-20 originally announced. In case of the centre, the RBI had said that it may issue bonds if the central government utilizes 75 per cent of its WMA.

In case of states, the central bank has constituted a committee to look into the WMA limits of states and union territories. However, the raising of limit is an ad hoc measure, pending the recommendation of the committee. In mid-March, the RBI had a meeting with all the states to discuss increasing the WMA limit.

Relaxing the export norms, the RBI said exporters can now take 15 months to realise and repatriate their export proceeds, for exports made up to July 31. As per the normal rules, the exporters have to repatriate the export proceeds within 9 months. But the RBI took the call to give the leeway to the exporters to “enable the exporters to realise their receipts, especially from COVID-19 affected countries within the extended period and also provide greater flexibility to the exporters to negotiate future export contracts with buyers abroad”.

RBI notifies special series of G-Secs under 'fully accessible route'

The Reserve Bank of India (RBI) on Monday said it will issue certain series of government securities (G-secs) under the “fully accessible route”. These special securities will attract no foreign portfolio investor (FPI) limits until maturity and are the first step towards Indian G-Secs being listed on global bond indices as the Centre looks to attract access cheap liquidity in the overseas markets.

The RBI also raised upwards the FPI limits for corporate bonds to 15 per cent, from 9 per cent, for 2020-21. However, the overall FPI limit in G-secs of 6 per cent has not been changed as yet. “The revised limits for FPI investment in G-Secs and state development loans for 2020-21 (FY21) will be advised separately,” the RBI said. “The RBI shall notify the G-secs that shall be eligible for investment under the fully accessible route for non-resident investors. These securities will continue to be eligible for investment by residents,” the central bank said in a circular.

The ministry tweeted: “This will substantially ease access of non-residents to the Indian government securities markets and facilitate inclusion in global bond indices. This would facilitate the inflow of stable foreign investment in Indian bonds.”

The RBI did not say what percentage of the Rs 8-trillion gross borrowing for FY21 will be through the special securities, but sources said it could be anything between 15 per cent and 20 per cent. This means anything between Rs 1.2 trillion and Rs 1.6 trillion could be borrowed through these bonds without FPI restrictions.

chartThe RBI notification follows a Budget announcement by Finance Minister Nirmala Sitharaman regarding the same. “Certain specified categories of G-secs would be opened fully for non-resident investors, apart from being available to domestic investors as well,” Sitharaman had in her FY21 Budget speech.

The RBI said all new issuances of G-secs of 5-year, 10-year, and 30-year tenors from FY21 will be eligible for investment as “specified securities”.

Some of the global bond indices that could embrace Indian G-secs, if all the conditions are met, include the Bloomberg Barclays Global Aggregate Index, FTSE Russel Asia Pacific Government Bond Index, and JPMorgan Government Bond Index-Emerging Markets. These indices have conditions which favour scale and size. For example, according to the criteria of some of these indices, each issuance should be $400 million at least, and the total quantum of the bonds should be at least $5 billion.

Ministry officials have had several meetings with the RBI, as well as the administrators of the global bond indices. They have also met banks which may act as potential market makers for the bonds.

Government officials as well as bond market analysts said being part of the global bond indices would help Indian G-secs attract large funds from major global investors, including pension funds.

RBI buys bonds worth Rs 10k cr, to conduct 2 more OMOs of Rs 30k cr

The Reserve Bank of India (RBI) will buy bonds worth Rs 30,000 crore from the secondary market, after buying Rs 10,000-crore bonds on Friday, to infuse durable liquidity into the system so that the market continues to function normally amid a coronavirus-induced slowdown.

The central bank received bids worth Rs 45,049 crore for Friday’s open market operation (OMO), through which the RBI bought Rs 10,000 crore of bonds. The response showed that the market needed liquidity support from the RBI.

“The response to the open market purchase auction conducted on March 20 has been positive,” the RBI said in a statement.

“Meanwhile, with the COVID-19-related dislocations, stress in certain financial market segments is still severe and financial conditions remain tight. The RBI’s endeavour is to ensure that all markets segments function normally with adequate liquidity and turnover.”

The central bank said it will conduct two more OMOs, of Rs 15,000 crore each on March 24 and March 30, respectively, to pump in more liquidity. The bonds to be purchased in the first auction mature between December 2022 and January 2029.

The banking system is not running a liquidity deficit. There is, in fact, Rs 2.93 trillion of surplus liquidity in the system, shows the RBI data.

But bond yields have risen as foreign investors liquidated their holdings in search of safe haven. The bond market, in such cases, would need to depend on domestic investors who may want liquidity support to invest in bonds, say bond dealers.

Besides, RBI’s expressed liquidity operations also help boost the morale as the market gets a signal that the central bank is there to take care of any need, should there be any market disruption because of the coronavirus pandemic, they said.

Earlier this week, the RBI said it will infuse liquidity into the system through Rs 1 trillion of long-term repo operations (LTROs) and will also increase dollar liquidity through a sell-buy swap of dollars, starting with a $2-billion swap.

The first tranche of the LTRO, for Rs 25,000 crore, took place on Wednesday. The LTRO for a three-year tenure saw participants bidding for a total of Rs 27,096 crore. The RBI has already infused Rs 1 trillion of liquidity through LTROs in its first operation.

The 10-year bond yield fell after the OMO announcement. The yields closed at 6.26 per cent, down from its previous close of 6.41 per cent. The rupee closed at 75.20 a dollar, down from its previous close of 74.99 a dollar.

Banks to approach RBI for relief on NPA classification amid Covid-19 fears

The coronavirus pandemic has sparked concerns about a fresh surge in bad loans at India’s lenders, and the industry body representing the banks plans to appeal to regulators to provide some reprieve in bad-debt classification, two sources told Reuters on Tuesday.

“Discussions are on at this stage and we will make a representation to the regulator to see if we can get some relief regarding non-performing asset classification in the small and medium enterprises sector,” one of the bankers said.

The appeal to the Reserve Bank of India (RBI) will be made via the Indian Banks’ Association, the two senior bankers said, asking not to be named as the talks were still private.

India’s economy expanded at its slowest pace in more than six years in the last three months of 2019 and analysts have predicted a further deceleration caused by the global COVID-19 outbreak.

Small businesses that were already reeling under stress due to the economic slowdown have been among the worst affected and banks have begun to see delays in loan repayments from them.

“Even though it is early we are beginning to see signs and as these are unprecedented times we want to ensure that we can provide some support,” said the chief financial officer of a public sector bank.

The RBI had assured markets that it will take considered, calibrated actions to tackle the threat to the economy from the outbreak.

India has over 135 confirmed coronavirus cases, with several hundred people in isolation. Tourist sites and other places of mass gatherings such as cinemas and malls are being shut in major cities to curb the spread of the disease.

As fear grips the nation amid health concerns, Indian banks - already burdened with some $140 billion in bad loans - worry their balance sheets could be hit further as businesses grind to a standstill.

RBI tells banks to put in place biz continuity plans to prevent disruption

The Reserve Bank of India (RBI) told banks on Monday to take stock of critical processes and revisit their business continuity plans to prevent any disruption of services, while encouraging customers to use digital banking. Banks must constitute a quick response team, “which shall provide regular updates to the top management on significant developments and act as a single point of contact with regulators/outside institutions/agencies”, the RBI said. Banks and regulated entities “should also assess the impact on their balance sheet,” it said.

Reserve Bank governor Shaktikanta Das to hold meet with bank CEOs today

Reserve Bank of India Governor Shaktikanta Das will meet chief executives of commercial banks on Monday to take stock of monetary transmission. The issue of dealing with the effects of the coronavirus outbreak on the financial sector is also likely to figure during the interaction.

Senior public sector bank executives said usually, bank chiefs meet the RBI brass immediately after the monetary policy review. The Monetary Policy Committee met on February 4-6, and kept the repo rate unchanged at 5.15 per cent.

One of the issues that will come up for review is how much transmission of policy rate actions to the final customer has happened.

In its last monetary policy review, held in early February, the RBI had introduced measures like long-term repo operations (LTRO) and external benchmarking of new floating rate loans by banks to medium enterprises. “The RBI would likely to hear us out on the progress being made in these areas. The assessment of the implications of the coronavirus outbreak may figure in our discussions,” a senior PSB official said.

The RBI had decided to conduct term repos of one-year and three-year tenors from the fortnight beginning February 15. The overall size of these LTROs is Rs 1 trillion. It has already conducted two auctions for Rs 25,000 crore each.

Since June 2019, the RBI has ensured that comfortable liquidity is available in the system to facilitate the transmission of monetary policy actions and the flow of credit in the economy. This was done to assure banks about the availability of durable liquidity at a reasonable cost based on the prevailing market conditions.

The RBI in its February policy review statement had stated: “The monetary transmission across various money market segments and the private corporate bond market has been sizable. The RBI has cumulatively reduced the policy repo rate by 135 basis points since February 2019. And, the transmission until the end of January was 146 bps in the overnight call money market. The transmission has been of 190 bps for three-month commercial papers of non-banking finance companies.”

Transmission to the credit market is also gradually improving. The one-year median marginal cost of funds-based lending rate (MCLR) declined by 55 bps during February 2019-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 by 13 bps during February-December 2019.

After the introduction of the external benchmark system, most banks have linked their lending rates for housing, personal, and micro and small enterprises (MSEs) to the policy repo rate.

The monetary transmission has improved to sectors (retail and MSEs) where new floating rate loans have been linked to the external benchmark. Now, the pricing of loans to medium enterprises will also be linked to an external benchmark, effective from April 1, to strengthen monetary transmission.

During October-December 2019, the WALRs of domestic (public and private sector) banks on fresh rupee loans declined by 18 bps for housing loans, 87 bps for vehicle loans, and 23 bps for loans to micro, small and medium enterprises (MSMEs).

RBI unveils 5-yr financial inclusion strategy: Here're key recommendations

The Reserve Bank of India (RBI) has come up with a National Strategy for Financial Inclusion 2019-24, aimed at providing access to formal financial services in an affordable manner. It aims to promote financial literacy among customers.

The Financial Inclusion Advisory Committee of the RBI — in consultation with the Centre, Securities Exchange Board of India (Sebi), Insurance Regulatory and Development Authority of India (Irdai), and Pension Fund Regulatory and Development Authority of India (PFRDA) — has recommended various ways in which the objective can be fulfilled.

The committee has recommended universal access to financial services wherein every village should have access to a formal financial services provider within a 5-km radius. Customers may be on-boarded through an easy and hassle-free digital process. This includes increasing banking outlets of commercial banks. Further, digital financial services have to be strengthened in all tier-II to tier-VI centres to facilitate a less-cash society by March 2022.

RBI unveils 5-yr financial inclusion strategy: Here're key recommendations

The plan aims to provide basic financial services — savings account, credit, micro-life and non-life insurance products, pension product, and a suitable investment product — to every eligible adult. To achieve this, every adult enrolled under the Pradhan Mantri Jan Dhan Yojna should be enrolled under an insurance scheme and pension scheme by March. Further, the public credit registry has to be made fully operational by March 2022 so that authorised financial entities can leverage the same for assessing credit proposals.

Under the national strategy, the committee has recommended new entrants to the financial system — eligible and willing to undergo any livelihood/skill development programme — may be given the relevant information regarding government livelihood programmes to help them augment their skills.

The committee has said customers have to be made aware of the recourses available for grievance resolution. Adequate safeguards also need to be ensured to store and share customers’ biometric and demographic data, so that their Right to Privacy is protected.

Therefore, it has been recommended to devise a customer grievance portal or mobile application that will act as a common interface for lodging, tracking, and redressal of grievances pertaining to the financial sector, collectively by all stakeholders, by March 2021. It has also been advised that there should be co-ordination between all stakeholders.

Easier RBI asset quality norms puts banks at risk, mar transparency: Fitch

Issuing a warning about the adverse effect of relaxing asset quality norms, rating agency Fitch said the move it signifies a gradual shift away from RBI’s effort to enhance the quality and transparency of asset classification in Indian banking system.

The Reserve Bank of India gave 12 more months for the one-time restructuring scheme for micro, small and medium-sized enterprises (MSMEs). Also it announced a relaxation in asset classification for certain real estate projects, marking a further dilution of the regulator's drive to enhance loan recognition, Fitch said.

There is a risk that such regulatory leeway will perpetuate moral hazard as it allows aggressive lending growth and risk-taking in certain sectors in the five years till March 2019 (FY19).

It is not clear at the moment whether this forbearance will be extended to non-bank financial institutions (NBFIs). But the probability of this is high, considering the impact that the NBFI liquidity squeeze and a slowing economy have had on the MSME and real estate sectors.

In recent years, banks have preferred to lend to NBFIs, which lend heavily to the real estate and MSME sectors. This was a seen as a way to deploy their excess liquidity, while limiting their own direct exposure to these areas, Fitch added.

Indian banks have a poor track record with restructuring. The RBI's asset-quality reviews in FY16 and FY18 found that a dominant share of loans restructured post-FY12 had degraded into non-performing loans (NPLs). In that context, Fitch will make appropriate adjustments to objectively assess the performance of the underlying loan book of its rated entities in India. This will be done to ensure their comparability with those of global peers.

The RBI's latest measures also nudge banks to lend more for specific purposes, namely automotive and housing purchases, and to the MSME sector. Banks can now knock off the equivalent of additional loans disbursed to these fields between end-January and end-July 2020 from their net demand and time liabilities for calculating their cash reserve ratio.

RBI policy: Repo rate unchanged at 5.15%; FY21 GDP growth projected at 6%

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 5.15 per cent — a 10-year low in its last policy review of the financial year 2019-20 (FY20).

Consequently, the reverse repo rate stands unchanged at 4.90 per cent.

Further, the bank said it will maintain 'accommodative' policy stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

The committee voted 6-0 in favour of the status quo of the interest rates.

GDP growth forecast for the financial year 2020-21 (FY21) is projected at 6 per cent and in the range of 5.5-6.0 per cent in the first half of the next fiscal and 6.2 per cent in Q3 (October-December period). GDP growth for FY 2019-20 is seen at 5.0 per cent.

The CPI inflation projection has been revised upwards to 6.5 per cent for Q4:2019-20; 5.4-5.0 per cent for H1:2020-21; and 3.2 per cent for Q3:2020-21, MPC said in its release. The MPC noted that inflation surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices. However, going ahead onion prices are likely to ease on the improvement in supply conditions.

"Going forward, the trajectory of inflation excluding food and fuel needs to be carefully monitored as the pass-through of remaining revisions in mobile phone charges, the increase in prices of drugs and pharmaceuticals and the impact of new emission norms play out and feed into inflation formation," the statement added.

Accordingly, the MPC will remain vigilant about the potential generalisation of inflationary pressures as several of the underlying factors cited earlier appear to be operating in concert.

Addressing media, RBI Governor Shaktikanta Das said that the repeat of status quo should not be seen as an indicator of future action. He further said that economy remains weak and the output gap is negative. The RBI governor further said that

transmission to credit markets are improving gradually and monetary transmission should help boost demand.

"Have many instruments at our disposal to address the slowdown," Das added.

Meanwhile, the RBI announced that the CRR (Cash reserve ratio) will fall for every incremental loan given. CRR leeway on new consumer loans will be applicable till July 31.

In its last policy meet, the central bank had maintained the repo rate at 5.15 per cent points (bps). However, GDP growth forecast for FY20 was slashed to 5 per cent from 6.1 per cent.

WHAT ANALYSTS SAY

Dr. Joseph Thomas, Head of Research at Emkay Wealth Management said at this juncture, rate modification is actually not required as the interbank market has a huge surplus of close Rs 3 lakh crore to support the liquidity requirements of the system, and this alone will ensure that the short-term rates do not move up. "The status quo comes as a relief to the short end of the curve, but the pressures at the long end may persist for longer time," Thomas added.

"It was an expected move by the RBI, maintaining the repo rate unchanged at 5.15 per cent. With the inflation rate breaching the upper band, it will take time for the Central Bank to revive the rate cuts. By maintaining the accommodative stance, there is scope for rate cuts once the inflation rate falls back to a comfortable level," said Deepthi Mary Mathew, Economist at Geojit Financial Services.

Foreign brokerage firm Nomura expects GDP growth to slow further to 4.3 per cent in Q4 2019 from 4.5 per cent in Q3, and see a below-trend growth of 5.7 per cent in FY21 from 4.7 per cent in FY20. "We see the current inflation spike as transitory and expect a lack of fiscal activism to open up monetary policy space. We also expect the RBI to leave policy rates unchanged and retain its accommodative stance, but signal future easing; we expect a 25bp rate cut in Q2 2020," it had said in its policy review note.

Analysts at Brickwork Ratings had anticipated the slump in GDP growth has bottomed out to 5 per cent in 2019-20 and expected to rebound in 2020-21 to 5.5-6 per cent, aided by the government measures and the transmission of past rate cuts.

Post Budget proposals, analysts see RBI holding rates in February MPC meet

After the Budget presentation last week, investors are now looking forward to the Reserve Bank of India’s (RBI) February bi-monthly policy outcome. The central bank’s monetary policy committee (MPC) will begin its three-day meeting tomorrow, and will announce its decision on February 6.

Most economists expect the central bank to maintain a status quo on Thursday, even as they remain divided on whether the central bank will continue to retain the 'accomodative' stance as regards the tone of the policy.

Aditi Nayar, principal economist at ICRA, for instance, expects the RBI to maintain status quo on February 6, but sees the stance changing from ‘accommodative’ to ‘neutral’. Besides, she sees the apex bank extend the pause to, at least, one more MPC meeting due to prolonged inflationary pressures.

ICRA pegs the average inflation in Q4FY20 at 5.6 per cent, and expect the RBI to revise upwards its inflation target for the next three quarters.

ALSO READ: Brace for volatility as Budget hangover, coronavirus keeps markets on edge

“In 2019, the RBI had become increasingly responsive to global and domestic growth concerns. We expect this to fade as it gets further comfort from the announcements in the budget,” wrote analysts at Goldman Sachs in a recent note. They expect the RBI to keep the policy rates on hold, with ‘neutral’ stance.

Retail inflation shot to about five-and-half year high of 7.35 per cent in December 2019, surpassing the RBI's comfort level, mainly due to spiralling prices of vegetables.

Following the November print of 5.54 per cent, RBI had sprung a surprise and opted to hold the repo rate at 5.15 per cent. It, however, continued with the accommodative stance as long as it was necessary to revive growth while ensuring that inflation remains within the target.

ALSO READ: Budget 2020: Govt's reliance on small savings makes rate transmission tough

The focus then had shifted to the Union Budget, which delivered a new tax regime with lower, but conditional, income tax rates in order to increase the purchasing power of the people. The revised system, however, may not have the desired effect, say analysts.

"While we expect the RBI to maintain status quo on February 6, we see only one rate cut going forward in FY21," says Devendra Pant, chief economist at India Ratings and Research. He adds that the inflationary pressure, though cyclical in nature, needs to be tracked on monthly basis to decide the next rate cut.

Though the revised income tax rates will put more money in the hands of the people falling in the middle-income tax bracket and is likely to boost consumer spending to some extent, one of the primary reasons for the current slowdown is weak rural demand, argues Rumki Majumdar, economist at Deloitte. She expects the central bank to remain accomodative, but hold rates in the February policy review.

“A prolonged deleveraging cycle and a clogged financial sector mean that any growth recovery from the current downturn will take much longer. We also expect the RBI to leave policy rates unchanged and retain its accommodative stance in the upcoming policy review on February 6,” wrote Sonal Varma, managing director and chief India economist at Nomura in a post Budget note.

RBI & MARKETS

Analysts say that the markets are pricing in a status-quo in the February policy meeting and would now track the Modi-Trump meeting for further direction.

“Markets shouldn’t react negatively to the status-quo as they have corrected already post Budget… That said, the next near-term event for the markets will be the meeting between US President Donald Trump and Prime Minister Narendra Modi,” says Ambareesh Baliga, an independent market expert.

According to reports, India and the US could sign a trade deal in the second week of February -- that has been stalled since September last year – ahead of Trump’s visit to India that is expected between February 24-26.

That apart, Baliga says the shift of engineering and speciality chemical firms from China to India in the wake of coronavirus, too, could affect movement in markets.

RBI accepts Kotak Bank promoters' plan to cap voting rights, reduce stake

Private sector lender Kotak Mahindra Bank on Thursday said that the Reserve Bank of India (RBI) in a letter to the bank on January 29 has agreed in-principle to cap promoters’ voting rights in the bank to 20 per cent of the paid up voting equity share capital until March 31, 2020.

The banking regulator has also said that the promoters' voting rights should be brought down to 15 per cent of the paid up voting equity share capital (PUVSEC) from April 1, 2020.

Moreover, the RBI has conveyed to the bank that the promoters have to bring down their shareholding in the bank to 26 per cent of the PUVSEC within six months of receiving the final approval from RBI.

Promoters led by Managing Director and CEO Uday Kotak owned 29.96 per cent of the share capital as on December 2019.

Thereafter, the promoters will not purchase any further paid up voting equity shares’ of the bank till the percentage of promoters’ shareholding reaches 15 per cent of the bank or such higher percentage as may be permitted by RBI in future.

The RBI has further said that the promoters of the bank will be entitled to purchase additional shares of the bank’s equity capital up to 15 per cent or such higher percentage as may be permitted in the future, and exercise voting rights on such shares.

The private sector lender informed the stock exchanges that it has withdrawn the writ petition it had filed in the Bombay High Court against the regulator.

In December 2018, Kotak Mahindra Bank had moved a writ petition in the Bombay High Court against the RBI after the central bank did not accept the reduction of promoter shareholding through an issue of preference shares.

The RBI had mandated the bank to reduce its promoter shareholding to 20 per cent by December 31, 2018 and to 15 per cent by March 2022. In August 2018, the lender had issued perpetual non-convertible preference shares, which it said would trim promoters' shareholding from 30.3 per cent to 19.7 per cent but the regulator did not agree with this method.

The bank had sought interim protection from the RBI directive and proposed capping of voting rights of the promoters. The private lender was ready to issue an undertaking to limit its promoter voting rights to 20 per cent until May 2020 as concentration of power by the promoter is the main issue for the banking regulator.

According to RBI norms, a bank needs to bring down its promoter shareholding to 40 per cent in the first three years after starting operations. Thereafter, the bank needs to bring down its promoter shareholding to 20 per cent in 10 years and 15 per cent in 15 years.

In a first, RBI puts out minutes of its October central board meeting

The Reserve Bank of India (RBI), for the first time, put out minutes of its October central board meeting, albeit with some information blacked out.

To enhance transparency, the central bank will continue to put out the minutes in the public domain in spirit of the Right to Information Act, after “after appropriately severing information that is permitted to be severed in accordance with the Act”.

Such minutes will be available within two weeks from the date of its confirmation in the next meeting of the central board and on being signed by the chairman in the same meeting, the RBI said in a statement on its website.

The PMC Bank crisis was not in the agenda of the meeting, but was discussed with the permission of the RBI governor, who is the chair of the board. Presumably, the agenda was set before the PMC Bank crisis came to light towards the end of September.

The minutes put out for public viewing pertains to the 579th meeting of the central board held in Chandigarh on October 11 last year.

While the minutes as such did not point to anything that has not been publicly disseminated by the RBI, a general view of the various push and pull can be gauged. The RBI’s central board is made of representatives from the central bank, from corporate industry, as well as from the government. While all work for a common goal of economic prosperity, there are some interesting viewpoints.

“A director presented his perspective on select industries viz. automobiles, real estate, steel, power and road transport. He was of the view that a concerted effort on the part of the government as well as various regulators is needed to improve the situation,” the minutes noted.

The board reviewed the macroeconomic developments, focused on issues related to financial markets, impact of monsoon on agriculture sector and prices, agriculture infrastructure and the external sector situation.

The board discussed in detail the current state of the financial sector “with special focus on the regulatory and supervisory architecture of commercial and co-operative banks as also NBFCs”.

While PMC Bank was discussed in relation to the framework of supervision of banks and other financial entities supervised by the central bank, the board was assured that the RBI has taken several measures to strengthen such aspects in the regulated entities.

The board also accepted a plethora of proposals, and review of various departments, proposed by various executive directors in the central bank.