While the RBI policy statement was quite uninteresting, the same cannot be said about the Statement on Developmental and Regulatory Policies. The RBI has announced a slew of measures to facilitate transmission.
1) Incremental lending to retail for auto or residential housing and to the MSME sector till 31st July 2020 will be eligible to be deducted from NDTL for computation of CRR (Cash Reserve Ratio) i.e the percentage of NDTL the banks park with RBI and on which they earn no interest.
2) The RBI said it would conduct Long Term Repo Operations (LTRO) under which they would offer funds to banks at the repo rate. This has resulted in the term premium up to 3 years crashing. LTFX up to 3 years has collapsed. 3-year MIFOR has come off by 10bps. Corporate bond spreads in 3 years maturity have narrowed 10bps. 3y OIS has come off 4bps. The RBI is, therefore, attempting to ensure abundant liquidity at low cost to facilitate on-lending.
3) External benchmarking under which RBI had mandated banks to link incremental loans to Retail and micro and small enterprises to the repo or T-bill rate shall be made mandatory for new loans to medium enterprises as well from 1st April 2020.
4) For commercial real estate projects facing genuine difficulties, the date of commencement of commercial operations has been extended by 1 year which implied the banks can continue to show these loans as standard assets on their books and therefore do not need to make provisions for the same.
5) The deadline for a restructuring of MSME accounts has been extended to 31st December 2020 from 31st March 2020 after which they would have to be classified as default accounts. Banks can work towards getting these accounts restructured and thereby avoid taking a hit on them. This should provide further relief to the ailing MSME sector.
In a nutshell, the RBI is doing its bit to ensure ample low-cost liquidity is available to the banking sector. It is taking measures to revive banks' confidence to kickstart lending.
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