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RBI announces monetary stimulus to boost economy
Steps to infuse INR3.74t; Forbearances to aid asset quality/credit flow
* The Reserve Bank of India today joined the Central Government in providing relief to the economy battered by the Covid-19 Pandemic. After earlier announcements by FM on various welfare and relief measures under the Prime Minister Garib Kalyan Yojana, the RBI today unleashed a series of steps to soften interest rates, improve liquidity and offer some immediate relief to borrowers. RBI’s actions are better than expected and should improve sentiments in the Bond markets and in the BFSI segment. These steps combined with potential fiscal stimulus package could mitigate the hardships faced by the economy in lockdown and alleviate the stress as and when lockdown is lifted.
* The announcement on 27th Mar’20 includes reducing the policy rate by 75bp, providing liquidity in the system and allowing moratorium of term loans for three months to support the affected sections and increase credit flow in the economy.
* Further, steps have also been taken to iron out issues in the bond markets. Key announcements highlighted and our views on the same:
Measures to infuse INR3.74t in the economy; Bond yields to moderate further
* Targeted Long Term Repo Operations (TLTRO): The RBI has announced auctions of targeted term repos of up to 3 years tenor for a total amount of up to INR1t at floating rate linked to the policy repo rate. Banks will have to buy investment grade bonds, commercial papers and NCDs from the market over and above their outstanding level of exposure in such instruments (as on 27th Mar’20). ~50% of the incremental holding will have to be acquired from the primary market and the remaining ~50% from the secondary market (including MFs/NBFCs). These investments will be considered as HTM and the banks will be permitted to hold above 25% of their statutory limit. Further, incremental exposure will not come under the large corporate framework guidelines. We believe this will successfully iron out issues in corporate bond yields, which have seen sharp rise in spreads over GSECs in the last week or so (Refer exhibit 1-8).
* Reduction in Cash Reserve Ratio (CRR) by 100bp to 3%: The RBI has also decided to reduce the CRR by 100bp from the current 4% to 3%; this is expected to release ~INR1.37t liquidity in the system. Since PSU banks are already carrying excess liquidity and have SLR of ~25% (v/s ~20% for major private banks), we believe this reduction in CRR will help the flow of credit from private banks as they are running at much higher CD ratio of ~90% (v/s ~70% for PSU banks). We further believe that this could generate an additional income of ~INR100b (7-8bp boost to margins) at the system level and could result in incremental contribution of ~4-5bps to the ROA’s of bank (~2-4% of PPoP). Further, the average daily CRR requirement has been brought down from 90% to 80%, which could help generate another source of income for banks, although not material in nature. Reduction in the CRR has a higher multiplier effect to generate credit growth in the system, which is a key positive.
* Marginal Standing Facility (MSF) limit raised from 2% to 3%: Further, the RBI is increasing the MSF limit from 2% to 3% till 30th Jun’20, which could further increase the credit flow in the system by releasing liquidity of ~1.37t in system.
Moratorium offered on term loans; WC interest to be deferred for three months
In addition to the above mentioned measures, the RBI has announced certain relaxations in the regulations to mitigate the burden of debt servicing caused due to disruptions led by the COVID-19 pandemic.
* All lending institutions are permitted to allow a moratorium on term loan repayment for a period of three months for loan outstanding as on 1st Mar’20, without changing the asset classification.
* Deferment of interest on working capital (WC) loans, which are outstanding as on 1st Mar’20 for a period of three months without changing asset classification.
* Additional WC limits to tide over the financial strain caused by the COVID-19.
These steps were highly anticipated from the RBI considering the cash flow strain across the board. We believe these steps are in the right direction and a big positive, especially for entities that lend to self-employed and the MSME/SME segment. This is also beneficial for retail term loans (home loans, auto loans, etc.). In our assessment, NBFCs with high Stage 2 loans ratio, which would have been most vulnerable from the lockdown, would be benefited the most from the moratorium (refer Exhibit 22). In addition, it is important to note that while NBFCs would also get relief on their bank loans (~35% of total borrowings for NBFCs), borrowings from NCDs, CPs, deposits, etc. would not come under the moratorium. However, with an average of 8-12% liquidity on the balance sheet for most NBFCs, we do not foresee any major ALM impact from the moratorium.
Other regulatory measures
The RBI has announced a few other regulatory measures, such as:
* Deferring the implementation of 100% net stable funding ratio (NSFR) by 6 months from 1st Apr’20 to 1st Oct’20.
* Deferring the implementation of the last tranche of additional 0.625% capital conservation buffer (CCB) by 6 months from 31st Mar’20 to 30th Sep’20. Though the banks are already maintaining a much higher ratio, this would enable banks in absorbing incremental credit losses due to COVID-19 disruption.
* Permitting banks to deal in offshore Non-Deliverable Forward (NDF) INR market.
* Overall, although some of us were complaining about the RBI’s delayed response to the COVID-led disruptions, the announcement of the massive package delivers more than expected, and thus, effectively provides massive comfort to the financial system.
* Notably, while the banking system was already in liquidity surplus for the past 9- 10 months, additional liquidity should help boost sentiments. Further, while demand-side and risk-aversion constraints remain as valid as pre-COVID19, reduction in the CRR and additional limit under marginal standing facility (MSF) could address the supply limits.
* The temporary regulatory relief for the financial sector and relaxation for their borrowers was need of the hour and the RBI has delivered. The fact that the TLTROs are now attached to their deployment with 15 working days and banks will earn almost 75-115bp lower on the excess money parked with the RBI, should actually nudge the banking system to start putting money to use in the real economy.
* Further, the government’s welfare package announced on 26th Mar’20, was required on an urgent basis for the poorest or vulnerable sections of the society.
* However, what we find missing in the RBI’s announcement on 27th Mar’20 is the direct support of the central bank to the corporate bond market and further buying of government securities to support more fiscal spending [open market operations (OMOs) purchases] or quantitative easing. But, quantitative easing could be announced at a later stage, if and when, the government announces an economic stimulus package.
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