RBI has made life a bit easier for NBFCs, MFIs amid Covid-19 pandemic

The Reserve Bank of India (RBI) has proactively made two sets of relevant announcements as a follow-up of what were made in the credit policy recently. The first is to focus on provision of liquidity and the second to sharpen the solvency issue related to companies.

The TLTRO is now being increased by Rs 50,000 crore with the caveat that 50 per cent has to go to the small and medium size non-bank finance companies (NBFCs), which in a way, is sectoral targeting starting with this segment. This is a positive move as NBFCs, including micro finance institutions (MFIs), are an integral part of the financial system and require support in the form of liquidity. The RBI has said that this amount can be increased; and while it has not mentioned other specified targeting, it looks like that it cannot be ruled out. Along with this amount, there is another Rs 50,000 crore being given to Nabard, Sidbi and National Housing Board (NHB) to enable refinance, which is an indirect way of supporting agriculture, small industry and housing companies. As the funds will be given at 4.4 per cent, the refinance rate would also be reasonable.

The State ways and means advances (WMA) limits have been increased by another 30 per cent to 60 per cent now over the March 31 level. This is important to address the liquidity concerns of States, which are now in a tough spot. The lockdown has ensured that revenue is reduced to a minimum, which when combined with higher expenditure, will require support from the RBI to make ends meet.

Credit flow

The other aspect which has been plugged by the RBI is the flow of credit. Today, actually there is no shortage of liquidity as seen in the net surplus liquidity of over Rs 4 trillion per day. It is just that banks do not want to take a chance in lending. Therefore, the RBI has now brought down the reverse repo rate to 3.75 per cent so that it becomes unattractive to invest in such overnight auctions and instead lend to the commercial sector. A suggestion here is that the RBI could instead use a cap on the auction limit, so that instead of the present level of Rs 4 trillion flowing in, only Rs 1-2 trillion would be accepted. That can be more effective under these circumstances.

The other set of regulatory measures are also quite pertinent. As the moratorium has been given for three months, the RBI has now removed this period as a part of the 90 days non-payment classification and there would be a case of reckoning the date from when the moratorium is provided as being the standstill time point. This, in effect, means that the 90-day classification would kick-in only after the moratorium ends for the purpose of classification. This is allowed by Basel, and hence, is in accordance with the best practices. However, from a prudential point of view, the RBI has asked banks to make an additional 10 per cent provision on these standstill accounts, which in turn, could be adjusted against the true non-performing assets (NPAs) later. This makes sense as the RBI has to think from the regulatory standpoint in the future as well.

As short-term measures the liquidity coverage ratio (LCR) has been lowered to 80 per cent for the time being and banks have been told not to pay any further dividend until an assessment is made. This is reasonable as we cannot be having a situation where banks are getting funding from RBI at a low cost and they are paying off larger dividend. This is not good for the market but makes strong economic sense.

The RBI has indicated that it expects inflation to come down by September, which means that more rate cuts are in the offing. This may not be good news for deposit holders, but industry can look forward to easier times.

Madan Sabnavis is chief economist at CARE ratings. Views are personal.