RBI extends debt restructuring for MSME, ups gold LTV ratio; bank stks gain

The RBI will constitute an Expert Committee which shall make recommendations on the required financial parameters, along with the sector specific benchmark, to be factored into debt resolution plans

Rate sensitive stocks such as financials and realty counters soared in the afternoon session on Thursday after the Reserve Bank of India, in its second bi-monthly policy for financial year 2020-21 (FY21), announced measures to support NBFCs, HFCs, corporate debt market, debt MF, agriculture and backward districts (via priority sector loans). Besides, it announced a relaxation on loan-to-value (LTV) ratio for gold loans. The RBI, however, kept repo rate unchanged at 4 per cent. 

"It has been decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021," RBI governor Shaktikanta Das said.
 

Consequently, the Nifty Bank index surged to day's high, up 1.7 per cent, to 21,869 level on the National Stock Exchange at 12:50 pm. The index, however, ended 0.6 per cent higher. Nifty Private Bank and Public Bank indices, meanwhile, surged 1.65 per cent and 0.80 per cent, respectively during the day but ended 0.7 per cent higher and 0.3 per cent lower, respectively. Among individual stocks, HDFC Bank surged 2.4 per cent to Rs 1,052, while IDFC First Bank, ICICI Bank, State Bank of India, and Bank of Baroda were up in the range of 1-2 per cent. Besides, RBL Bank, IndusInd Bank, Federal Bank, and Axis Bank gained between 0.5 and 0.8 per cent.

"Not surprisingly, the RBI’s MPC unanimously held status quo on rates. Current level of rates in the system are benign enough to allow for a pause... More importantly, the RBI Governor addressed liquidity concerns in Covid crisis for housing, MSMEs, flow of credit in corporate bond markets and facilitating improved platform and system for banks. The policy will be seen as a positive for banking sector since (the policy was silent on) extension of moratorium, and allowed one-time restructuring allowed with strict conditions," said Amar Ambani, Senior President and Head of Research – Institutional Equities at YES Securities.
 

Further, the RBI introduced special resolution window under its June 29 circular. "The Reserve Bank is constituting an Expert Committee, under the chairmanship of K.V. Kamath, which shall make recommendations to the RBI on the required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into resolution plans. The Expert Committee shall also undertake a process validation of resolution plans for borrowal accounts above a specified threshold," Das said in his statement.  

"The central bank has preferred to play it safe with a pause even while reiterating that further space is available for more monetary action.The setting up of KV Kamat committee to advise on resolutions is an excellent decision," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. 

Additionally, the RBI relaxed LTV ratio for gold loans to 90 per cent from 75 per cent, which will be seen as positive for banks, especially south based bank such as CSB, Federal Bank, South India Bank and Karnataka Bank, said analysts at Ashika Institutional Equity.

A LTV ratio is the proportion of the gold value that a lender can finance through a loan. By hiking the LTV against gold loan, the RBI has tried to up the credit disbursal activity in the economy via gold financing as borrowers look to mitigate the financial exigencies caused by the coronavirus crisis. 

Under the 75 per cent LTV offered earlier, a lender would extend loan worth 75 per cent of the value of gold mortaged by the borrower. This loan value will now increase to up to 90 per cent, leading to higher credit disbursal.

"Increase in LTV for gold loans is a significant step. While we have to wait for the fine prints on debt restructuring, the step would be beneficial for both banks and borrowers in the near-term. The longer-term implication for banks, however, is less clear," said Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers. 

As regards realty stocks, the Nifty Realty index hit an intra-day high of 206 level, zooming 2 per cent. It settled 1 per cent higher at close. Prestige Estates jumped the most, adding over 7 per cent post the announcement, while Phoenix Mills Ltd, Oberoi Realty, and Sobha Ltd rallied up to 3 per cent after RBI governor Shaktikanta Das announced additional special liquidity facility of Rs 10,000 crore, to be provided at the policy repo rate.

"It would consist Rs 5,000 crore for the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs); and Rs 5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity," the governor said.

However, auto stocks skid post the policy announcment. Nifty Auto Index slipped up to 0.7 per cent on the NSE. Individually, Eicher Motors, Maruti Suzuki, Motherson Sumi, M&M, and Bajaj Auto declined up to 1 per cent. The index settled 0.12 per cent higher.