The Reserve Bank of India, often called a full service central bank which doubles up as a banking regulator, returned to more active management of credit policies with a series of steps intended to improve the flow of funds to a weak economy.

The push for improved credit is important at a time when fiscal and monetary space to boost the economy is limited. India’s monetary policy committee left its benchmark repo rate unchanged on Thursday. The government, while widening its fiscal deficit, intends to bring down the budget gap next year.

As such, credit policies are the best available option to boost the economy. To do this, the RBI announced the following measures:

• Banks will be given cash reserve ratio relief on incremental auto loans, retail housing loans and and all micro, small and medium enterprises loans. This, the RBI hopes, will incentivise banks to lend to these sectors.
• The relief on CRR will be available on loans given between Jan.30 and July 31, in an attempt to speed up credit flow.

The RBI had earlier reduced risk weights on retail loans, excluding credit card loans, to incentivise the flow of credit.

Responding to these decisions Jaideep Iyer, head of strategy at RBL Bank said it was quite critical to have some policy measures to ensure banks overcome some risk aversion.

“Firstly, the regulator is giving a message that they would want encouragement of credit transmission to specific sectors. Secondly, they have given absolute benefit in terms of incentivising banks by exempting them from Net Demand and Time Liabilities (NDTL) requirements for incremental lending. That’s a reasonably significant move as it would result in a percentage point benefit to banks,” Iyer said.

To follow the market’s reaction to MPC’s decision and RBI measures, click here...

Scheme To Recast MSME Loans Extended

The RBI said it will extend the one-time restructuring scheme for loans to MSMEs till Dec. 31. The recast scheme, announced in January last year, was to expire on March 31.

Goods and services tax-registered companies whose MSME accounts are in default as on Jan. 1, 2020 will be eligible for the one-time restructuring.

Union Finance Minister Nirmala Sitharaman said in her Feb. 1 Union Budget speech that the government had asked the RBI to consider extending the relief by a year till March 31, 2021.

“This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated Jan. 1, 2019 as also the MSME entities which have become stressed thereafter,” the regulator said in its statement.

The RBI said it’s a one-time dispensation. Last year, when the scheme was announced, analysts had pointed out that this could be the regulator’s return to forbearance.

Separately, the RBI said that loans to medium size enterprises, starting April 1, would be linked to an external benchmark. The regulator had linked all fresh floating-rate loans to the retail sector and to MSMEs to an external benchmark starting Oct. 1.

Relief To Commercial Real Estate

The regulator also announced measures to ease the stress on the commercial real estate sector. Borrowers facing repayment pressures because of situations beyond their control would be allowed to extend the date of commencement of commercial operations by a year. This extension would be allowed without classifying the loan account as a non-performing asset.

“This would complement the initiatives taken by the government of India in the real estate sector,” the RBI said. It’s in line with the RBI guidelines on other non-infrastructure loans.

Majors lenders to the real estate sector, including Housing Development Finance Corporation Ltd. Ltd, have been seeking a one-time restructuring scheme for genuinely stressed developers. Keki Mistry, vice chairman and CEO of HDFC, had said that lenders cannot extend further credit to real estate borrowers classified as NPAs since extant guidelines would dictate that any fresh lending be also classified as bad loans.

The RBI has stayed away from a restructuring scheme while providing some relief to under construction projects.