Below is the Quote for RBI Policy Update by Mr. Amar Ambani, Senior President & Head of Research – Institutional Equities, YES Securities (India) Limited
Repo rate cut of 40bps rate was need of the hour given the depressed economic activity and collapse in demand. However, another RBI rate cut was quite factored in and as a result India 10yr sovereign yields have moved lower by just 10 bps. Nevertheless, equity markets were expecting more from the central bank in terms of incremental Open Market Operations, respite to the banks in terms of not having to MTM HTM portfolio, and so on. Not surprisingly, banking stocks are down in trade. Though this announcement wasn’t a bazooka like the previous policy measures, there have been some positive measures like extension of term loan moratorium and increase in lending limit to corporates.
For banks, the extension of moratorium by another three months has two sides. The clarity on asset quality picture of the lenders will now emerge by March 2021 instead of September 2020. There is a risk of moral hazard issue creeping in, as borrowers who have the ability to pay, may even opt for moratorium. For MFIs and NBFCs catering to bottom of the pyramid customers, the risk of repayment behavior getting disturbed is higher. On the positive side, the moratorium extension gives more time to customers (professionals, small businesses, MSMEs and Corporates) for recovery in earnings/repayment capacity in an easing lockdown scenario. Thus, the probability of them slipping buckets after the end of moratorium on August 31st diminishes, and therefore the NPLs spike for lenders could be lower than what is anticipated now. Moratorium extension also gives time to lenders to strengthen their collection infra for retail products as restrictions on physical collection/follow-up eases out and the collection agencies would have had their migrant workforce back.
For the working capital facilities, the interest payment has been deferred by another three months, in-line with extension of moratorium on terms loans. The accumulated interest for the deferment period can be covered into a funded interest term loan payable be end of the current fiscal. Thus borrowers need not pay accumulated interest in one shot immediately after the deferment period, which is a big relief for them.
We expect more policy response from RBI in the future in terms of further rate cuts, OMOs to bring down yield curve, possibly even monetization of government borrowings in time to come.
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