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Monetary Policy Review
RBI reduced the repo rate by 35 bps to 5.4% from 5.75% while maintaining accommodative stance. We can now expect more transmission of rates into credit markets ·
GDP growth estimates for FY20 has been pruned down to 6.9% from 7% earlier – in our view, there could be more downside risks to these projected numbers. ·
Measures announced for BFSI sector to improve the credit flow to NBFC sector
* Single counterparty exposure limit for the banks exposure to single NBFCs has been enhanced to 20% of Tier I capital of the bank (which can be further expanded to 25% under exceptional circumstances) from 15% currently –Positive for the NBFCs. Banks can incrementally lend more to NBFCs especially those who have hit the limits
* Bank’s lending to registered NBFCs (other than MFIs) for on-lending to agriculture (investment credit) upto Rs10 lakh, micro-small enterprises upto Rs20 lakh and housing upto 20 lakh per borrower (up from Rs10 lakh at present) to be classified as priority sector lending. Detailed guidelines on the same are expected by August 2019 – Move again positive for NBFCs ·
Reduction in the risk weight for consumer credit except for credit card receivables to 100% from 125%. Guidelines on the same are expected to be issued by Aug 2019. This will release capital for some of banks which have higher portion of personal loans in their portfolios viz. major beneficiary HDFC Bank (22% of total loans) and others to small extent like Axis Bank (6% of total loans), ICICI Bank (6%).
Overall, this monetary policy takes into cognizance current slowdown in the economy by lowering rates and plugging the loopholes most importantly for NBFCs so that there are more incremental lending flows to them. In our view, GDP growth estimates looks over-optimistic and there could be potential more downside risks to these numbers. Lower GDP growth will eventually translate into lower credit growth numbers for the banks in general.
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