In the context of
contracting GDP, anemic demand, tepid growth in bank credit, asset quality
woes, cost-push inflation, and a fiscal under pressure, the 6th August monetary
policy was a momentous one. Three announcements stood out for their potential
repercussions: (i) rate action, (ii) way forward for borrowers, and (iii) new
regulations for opening and operating current accounts.
Rate action
Doing
nothing is sometimes more impactful than trying to do something. After a series
of rate cuts, we have a surfeit of liquidity, sluggish credit growth, low-risk
appetite of banks, and a negative carry on incremental deposits. Demand is
unlikely to be boosted by additional rate cuts. The CPI inflation in June was
6.1%, and even assuming some moderation, it is much higher than policy rates.
The status quo was probably the only option.
The way forward for borrowers
This
one was a much tougher call – one argument is that it is better to call a spade
a spade, and so let loans be classified as NPAs if borrowers cannot service
their loans. However, we do not have a good sense at this point in the scale of
the asset quality issue: GNPAs can rise by 50%, and in a pessimistic case,
double from FY20 levels. Many banks could find themselves falling short of
capital thresholds and invoking the PCA framework - effectively getting shut
out of the market.
The
RBI’s approach is to allow banks a window to provide relief to COVID-impacted
borrowers by restructuring their loans (subject to certain conditions), report
these as standard loans but make some provisions (though lower than if they
were NPAs). There are three questions: (i) how to identify COVID-impacted
borrowers, (ii) how much concessions should be provided, and (iii) what should
be the governance framework for the scheme.
Eligible borrowers for restructuring
The
policy states that borrowers who had at most 30 days past due on 1 March 2020,
but since then have been unable to service their loans can be said to be
impacted by COVID and would be eligible for the restructuring. These could be
retail, MSME, or corporate (but not agri) borrowers – this is the first time
that retail loans are permitted to be restructured without classifying them as
NPAs.
Concessions to eligible borrowers: Lenders can
extend the tenor by up to two years, subject to approval by 75% of lenders by
value and 60% by number. The scheme has to be signed off by 31 December 2020
and implemented in a time-bound manner, failing which, the concessions of this
scheme will not be applicable. The key change is that the loan can be
classified as standard even if there is no change in the ownership of the
borrower.
Governance framework
The
RBI has announced the appointment of a committee to decide the framework
including benchmarks for various sectors and review cases where the exposure
exceeds INR 1,500 crores. A reporting format has been prescribed for making
relevant disclosures.
Several issues of merit discussion
Firstly,
restructuring of retail loans is a first and comes at a time when lenders had
started to leverage bureau data. This scheme is almost certain to distort the
usability of data going forward. Secondly, having a regulator-appointed
committee to set the rules and even vet cases is moving from normative
regulation to prescriptive regulation. The Indian banking system had long moved
on from a world where the regulator prescribed everything to one where they
made decisions based on commercial judgment. Finally, given the provisioning
arbitrage, what is the assurance that the mistakes of the previous
restructuring cycle would not be repeated?
New
regulations for opening and operating current accounts: Private sector and
foreign banks have implemented cutting-edge technology solutions to help
businesses manage their funds effectively and enjoy a disproportionate share
of current account balances. The policy’s impact on current account balances
will be profound – not only would the pie shrink, but it will also be
redistributed in favor of lenders. This could have major implications in the
SME/mid-corporate segment where the lenders are mostly PSU banks, while private
sector banks enjoy the current account.
The intent of plugging diversion of funds is
absolutely correct, but the proposed approach will lead to a lot of issues.
Will customer convenience take a backseat – why should customers not get the
best products and solutions and be tied, instead, to their lenders? Several
transactions will become very inconvenient, e.g. a lender having 5% share in
the exposure who has issued a letter of credit will have to arrange for the
payment from the escrow banker. Does this policy ensure that there will be no
diversion of funds – would it not have been better to build an
information-sharing mechanism amongst banks?
Policymakers
have a tough job, and the COVID crisis is making them choose between options,
each looking worse than the other. The RBI is respected for its track record of
steering the economy and the banking system away from trouble. Let us hope that
its good run continues!
Authored by:
Shishir
Mankad, Practice Director, Financial Services
This post first
appeared on ET BFSI and has been published with permission.