Monetary policy a breather for banks; easing CRR can improve margins

As a push to ensure that retail loans remain growth drivers for banks, RBI has incentivised credit to segments such as automobile, housing and MSMEs

The Reserve Bank of India’s (RBI) monetary policy seems to have played its part to push growth, at least in select important pockets like loans to retail, micro- small and medium enterprises (MSMEs) and real estate. 

The Nifty Bank gained over 1 per cent, with IndusInd Bank, SBI, and Axis Bank among big gainers (up 1.8-4.9 per cent), while non-banking financial companies (NBFCs) like Indiabulls Housing, LIC Housing and PNB Housing surged 5-15 per cent.

To ensure retail loans remain growth drivers for banks, the RBI has incentivised credit to segments such as automobile, housing and MSMEs. Consequently, banks need not set aside 4 per cent of the loan outstanding as CRR (cash reserve ratio) for these loans. 

Though this facility is available till July 2020, Pankaj Pandey, head (research) at ICICI Securities, says this presents an opportunity to earn more without having to increase the interest rate. 

“This money was kept idle earlier,” he adds. That said, in sync with the practice of benchmarking retail loans to external rates, loans to MSMEs will also have to be linked to external benchmarks, making them more affordable. 

However, at a time when most banks have turned cautious on this segment, pricing the risks appropriately could be a challenge.

The realty sector also got a breather, as the date of commencement of commercial operations (DCCO) of project loans for commercial real estate — delayed for reasons beyond the control of promoters — was extended by a year without downgrading the borrower’s asset classification. 

In effect, these loans get another year for restructuring, taking the pressure off developers. For banks and NBFCs, real estate exposure may not cause asset quality problems just yet. However, Suresh Ganapathy of Macquarie Capital says this is at best a marginal dispensation. 

“The real challenge is where projects are operational and residential sales aren’t happening and developers sitting on huge amount of inventory,” he points out.

Among all, the one that stands out is the interest rate transmission under Long Term Repo Operations (LTRO). Under this, banks can access up to Rs 1 trillion at repo rate at one- or three-year tenors from February 15, thereby capping interest rate volatility. 

While finer details of the LTRO will be out soon, Pandey says such an option would give banks the leeway to curb their cost of funds.

In all, Edelweiss analysts estimate the rate transmission benefit to auto, housing and MSME loans at 25-30 bps besides credit push. For Ganapathy, the larger unaddressed question is that of risk-aversion. “Banks are unwilling to lend and are sitting on Rs 3.4 trillion of excess liquidity,” he says. Whether Thursday’s monetary policy will move the needle, only time will tell.