RBI's reverse repo cut significant, but banks need to increase risk appetite: Economists

The reduction in reverse repo rate by 25 basis points to 3.75 per cent by the Reserve Bank is a significant step but it is important that banks should increase their risk appetite, say economists and analysts.

The Reserve Bank of India on Friday announced a 25 basis points reduction in reverse repo to 3.75 per cent from 4 per cent in order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy.

"The reduction of reverse repo is significant but it needs to be seen if the flow to the private sector actually increases," Care Ratings Chief Economist Madan Sabnavis said.

DBS Bank India Economist Radhika Rao said the reduction in the reverse repo rate is meant to prod banks to consider lending activity rather than park funds with the central bank.

"Given the still sizeable funds that is being parked with the central bank under the reverse repo operations even after the 90 basis points cut in March, points to the limited credit and risk appetite of financial institutions," Rao said, while cautioning that a further reduction might disincentives banks to utilise the reverse repo window.

SBI's Group Chief Economic Advisor Soumya Kanti Ghosh said the RBI has excluded the accounts availing moratorium from the 90-day NPA norm, thus providing a breather to banks as well as customers.

"However, given the working capital challenges it is advisable for the RBI now to relook at the 90-day norm," he said.

Ghosh said once an account is classified NPA, the borrower will not be able to raise funds from any other lender.

"In the current circumstances the only way to save the economy and the financial system seems to be a relaxation of the IRAC norms i.e extending the 90-day schedule to 180 days," he said.

Ghosh, however, said this relaxation should be given along with a well laid out calendar of returning to the current norm of 90 days in the next two years, by which time hopefully the Covid-19 crisis would have subsided.

RBI also announced targeted long-term repo operations (TLTRO 2.0) for an aggregate amount ofRs 50,000 crore, to begin with, in tranches of appropriate sizes.

The funds availed under this will have to be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and midsized NBFCs and MFIs.

KPMG India Partner and Head (CFO Advisory) Sai Venkateshwaran said "the TLTRO 2.0 for a total of Rs 50,000 crores, will provide some of the much needed liquidity for NBFCs, that have been faced with a significant ALM mismatch as they haven't benefited from the grant of moratorium announced by RBI earlier."