RBI at rescue again

In short, 

• RBI’s first was March 27^th - cut interest rates by 75 bps and other relief was Moratorium.
• RBI’s second booster dose- cuts Reverse Repo rate by 25 bps to 3.75%.
• What is Reverse Repo rate? – Rate at which the RBI borrows money from banks.
• Expensive for banks not to lend.
• Positive move for corporates and borrowers
• To conduct TLTRO 2.0 for an aggregate amount of Rs. 50, 000 Crore to begin with.
• Liquidity booster for NBFCs and HFCs – At least 50% of amount must go to mid and small sized NBFCs and MFIs.
• Standard loans as of March 1, need not be classified as NPA till May 31.
• Banks required to maintain additional provisioning of 10% on standstill accounts.
• No monetization of deficit.
• No direct lending to NBFCs.
• No Repo against corporate bonds.

 Now the jargon behind this move, the reverse repo rate is the rate at which banks when they have nothing to do with the money, give it to RBI and RBI gives them just 3.75%. Now until very recently, the banks were getting almost 4.4% for money that they were unwilling to lend to anyone or they’ve yet to find a borrower. Now from 4.4% just last week by changing the rules of auction they had brought it down to 4%. Now they’ve brought it down further to 3.75%. now, look at the Psyche of a banker, then he is taking money, he gets a small amount as current account, which is for which he pays no interest, zero. When he takes money on savings account, they are paying almost 3% average. Some banks like Kotak, they even 5% and then they get money in Term deposits, like fixed deposits we get between 5% and 6%. So total cost of money for a bank or an average is about 4%, if you take an average, even for a bank with a lot of current and savings account. If you don’t lent it but keep it just lazily with RBI, you get only 3.75%, which is a loss for a banker. That is why the RBI bringing down the reverse repo rate, is a very big propeller for the economy. It forces the banks to lend because sitting on idle money is expensive. Of course, banks will bring down their deposit rates and therefore try to reduce cost, they don’t necessarily have to lend but it is a very good effort on the part of RBI to force banks to lend. Therefore, the lending rates are going to come down or at least you will find willing bankers for individual borrowers.

Now, for corporates, this is a very good sign. So this a plus for the economy, for corporates, for borrowers, for even you and me, if we care to take, a car loan or a home loan.

The next set of steps is reliefs for NBFCs. The RBI has said that it will conduct Long Term Repo (LTRO) - it will give banks money at 4.4% i.e., repo rate, but banks who take that money will have to lend it to NBFCs, Microfinance companies, and Housing finance companies. Why? Because, these guys have a lot of money coming to them in the form of bonds and debentures, which have to be serviced. But these borrowers i.e., the borrowers of NBFCs and HFCs got a moratorium in March 27^th  announcement i.e., for 3 months, they don’t have to pay interest and then of course, they’ll be charged higher interest rates later on. But that created a fund mismatch for the NBFCs i.e. they’ve to service the source of money but they were not getting interest on the money that they’ve lent out. So they were all complaining, this is not fair. RBI has provided this targeted LTRO money, which will got to them to meet the fund mismatch that solves a problem for one set of company and that’s not small at all. Because, NBFCs account for Rs. 30 Lakh Crore, HFCs account for Rs.7 Lakh Crore. So, Rs. 37 Lakh Crore of funds to the economy were complaining, now that complain is somewhat takes off.

The third relief is in classification of a bad loan. Now banks and NBFCs were telling RBI, you’ve given a 3-month moratorium for this lock-down period, March-April-May companies which don’t have money, because there’s no revenue, no activity, they don’t have to pay interest. But a lot of people are with overdue interest on their loans. Feb and March pay up by the 90^th day, because they don’t want to become NPA. So, March 15 to March 31^st, we would have got a lot of loans, which were would have paid actually in FEB and March in, by JAN end or FEB end itself, that would have come. Now you’re making us classify as NPA. So, now the RBI said, overdue loans also will be eligible for overdue loans, as of March 1^st, will also be eligible for moratorium, but you’ve to make a provisioning of 10% on those overdue loans. This is a good measure because it saves banks, borrowers from being tagged as NPA. Once you’re tagged as NPA, nobody services you a second base of life. So in a way, that was excellent move. For borrowers, it removes the immediate threat of NPA but if NBFCs and banks, it comes at a cost. They’ve to keep additional provisioning and that’s a very prudent measure, by looking at who deserve this moratorium and accordingly providing help. Ultimately, you don’t want banks to give moratorium for all and sundry, which will come back as bad loans at a later date.

Experts also say that RBI could’ve done more like,

RBI could’ve directly monetize central government deficit. Central government needs money to fight COVID-19, encourage SMEs but if you go to market, it is charging high interest rates, so RBI should directly take bond from the Government and give them money, which is called monetization of the deficit. RBI has not done that, all it has done is it has given a higher borrowing limits for states.

It is also not giving directly loans to the NBFCs, and it is giving it only through NABARD or NHB or through the banks.

Thirdly, they were told that if banks have corporate bonds, they can give it as collateral and RBI should lend Repo money. RBI has not done that either, it will give Repo only against Government securities.