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RBI announces measures to mitigate impact of COVID 2.0

Relief for most affected borrowers; reiterate our preference for large Private Banks

* The Reserve Bank of India (RBI) on 5th May’21 announced various relief measures on account of the resurgence in COVID-19 cases and subsequent lockdown announced by various states. Key measures are: a) extension of loan restructuring for individuals, small businesses, and MSMEs having an aggregate exposure up to INR250m and were standard as on 31st Mar’21, b) utilization of floating provision buffer by Banks towards loan loss provisions, c) on-tap special liquidity window of INR500b to enable Banks to build a ‘COVID-19 loan book’, and d) liquidity facility of INR100b to SFBs for fresh lending up to INR1m per borrower.

* On the asset quality front, extension of the restructuring scheme is a step in the right direction to help most borrowers affected by the COVID-19 pandemic, rather than announcing a blanket moratorium, which is not required for all borrowers and comes with other complexities (interest waiver, moral hazard, operational challenges, etc.).

* We note that the bulk of the slippages in FY21 has come from Retail and MSMEs. Higher restructuring was also availed by both these segments. Among Banks, large ones have seen sub-1% restructuring of loans, while midsize Private Banks/SFBs have seen higher loan restructuring. Please refer Exhibit 1 for more details.

* On the liquidity front, the special liquidity window announced to the tune of INR100b to Small Finance Banks (SFBs) constitutes ~10% of its current loan portfolio, which is a sizable lending opportunity. This will provide strong impetus to SFBs for on-lending, given the sizeable differential in funding cost. AUBANK and EQUITAS would be the key beneficiaries of this announcement.

* We continue to prefer Large Private Banks. ICICIBC, AXSB, HDFCB, and SBIN remain our top picks.

Restructuring scheme extended till Sep’21 for Individual/MSME borrowers up to INR250m

* The existing one-time restructuring scheme announced by RBI last year, under the Resolution Framework 1.0 for COVID-19 stress, has now been extended only to stressed borrowers, including individuals, small businesses, and MSMEs having an aggregate exposure up to INR250m on account of the resurgence in COVID-19 cases and subsequent announcement of a lockdown in various states.

* Borrowers, who were classified as ‘standard’ as on 31st Mar’21, will be eligible for restructuring under this Resolution framework 2.0. The resolution plan should be invoked by 30th Sep’21 and implemented within 90 days from the invocation date.

* However, the framework does not include previous restructured accounts. It does permit modification of the resolution plan by extending the moratorium period up to a maximum period of two years, if not already provided.

Additional liquidity facility for SFBs and special on-tap window to build a ‘COVID-19 loan portfolio’

* RBI made a few important liquidity announcements on 5th May’21 such as providing an on-tap special liquidity window of INR500b to enable Banks to build a ‘COVID-19 loan book’ to improve Healthcare infrastructure in India. The lenders can borrow from RBI for up to three years at the repo rate of 4%. These loans would be classified under priority sector lending.

* The central bank will also provide a special liquidity window to the tune of INR100b to SFBs, through special three-year long-term repo operations (SLTRO), at the repo rate. This INR100b facility is to be deployed for fresh lending with a maximum ticket size of INR1m per borrower and is available till 31st Oct’21.

Other important measures announced

* RBI has also allowed Banks to utilize 100% of floating provisions/counter-cyclical provisioning buffer towards making specific provisions for NPAs. This is allowed till 31st Mar’22. Some key Banks like HDFCB/SBIN/IIB have a floating provision buffer of INR14.5b/~INR1.9b/INR0.7b.

* It also announced that loans lend by SFBs to MFIs, with an asset size up to INR5b, will be eligible for classification as ‘Priority Sector Loans’. This facility will be available up to 31st Mar’22.

* To incentivize credit flow to MSMEs (borrowing exposure of INR2.5m), SCBs are allowed to deduct credit disbursed from their NDTL calculation for CRR computation. This facility, currently available till 1st Oct’21, has been extended till 31st Dec’21.

Valuation and view

* We believe RBI has announced effective measures which will provide relief to the most affected borrowers after the resurgence in COVID-19 cases and the announcement of a lockdown in several states. Extension of the restructuring scheme will help address potential stress arising from the most affected borrowers and is better than announcing a blanket moratorium, which is not needed for all borrowers. Most slippages during FY21 have predominantly come from Retail and MSMEs. Higher restructuring was availed in both these segments, thus underscoring their vulnerability. Among Banks, large ones have seen sub-1% restructuring, while midsize Private Banks/SFBs have seen higher restructuring of loans. The special liquidity of INR100b to SFBs at the repo rate will provide strong impetus to SFBs for on-lending, given the sizeable differential in funding cost. AUBANK and EQUITAS would be key beneficiaries of this development. We reiterate our preference for large Private Banks. ICICIBC, AXSB, HDFCB, and SBIN remain our top picks.

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