RBI Makes Life Easier for NBFCs, but the Broader Lending Environment Still Looks Uneasy

While the RBI has signalled its commitment to support the economy with liquidity measures, there is only so much it can do when there are fears and a trust deficit around asset quality.

The Reserve Bank of India on Friday announced a slew of measures to combat the challenges posed by the coronavirus.

The key takeaways are:

* The reverse repo rate, the rate at which RBI borrows funds from banks, is cut by 25 basis points to 3.75%. The repo rate (the rate at which banks borrow from RBI), however, remains unchanged (4.40%).

* Rs. 25,000 crore liquidity support for NABARD (National Bank for Agriculture and Rural Development), Rs 15,000 crore for SIDBI (Small Industries Development Bank of India) and Rs 10,000 crore for NHB (National Housing Bank)

* The 90-day NPA (non-performing asset) norm will not apply on moratorium granted on existing loans by banks

*A second round of targeted long-term repo operations of Rs 50,000 crore will be conducted to ensure that microfinance lenders and NBFCs are well lubricated.

* The LCR (liquidity coverage ratio) requirement of banks is scaled down to 80% from 100%. This will be restored in phases by April next year

* Banks are not allowed to make any further dividend payouts from profits for 2019-20, a measure to conserve capital.

* Loans given by NBFCs to real estate companies to get similar benefits as given by the scheduled commercial banks.

Central bank chief Shaktikanta Das also hinted at headroom for the monetary policy committee for a rate cut option in the future, adding that the RBI was on high alert and watching the evolving situation vigilantly. He promised that the Central bank would step in whenever required with appropriate measures as things progressed in the developing environment caused by the deadly virus.

The governor’s slew of measures notwithstanding, doubts still aren’t going away as to the results of these initiatives. No doubt this signals its commitment to support the economy with adequate liquidity measures. And as can be clearly seen, these measures are intended to help smaller industrial ventures and the NBFC and MFI sectors.

But the fact of the matter is that banks are practically wary of lending in this extreme environment. More than anybody else, individual banks know or understand the grave predicament of their clients. For very obvious reasons, they are just sitting tight, waiting for the situation to sort itself out in the current uncertain environment.

Estimates suggest that the banks are parking with RBI on a daily basis an amount close to Rs 6 lakh crore. That appears to be a safe bet for banks at the moment! It is often said that the banks have the uncanny ability to chase clients who don’t require their funds. The needy often get ignored by the banking industry. 

A significant give-away of banks’ wariness to lend is available in the central bank’s decision to cut the reverse repo rate. Ostensibly, this reverse repo rate cut is to discourage reverse flow to RBI. Will this help? This is indeed a moot point, and cannot be just wished away.

Banks are playing safe at the moment, and holding their hands back. Obviously, they don’t wish to take even the slightest risk in the current distressing environment. No doubt, the central bank has indicated some direction in terms of where the money should go. The fact of the matter, however, is that banks should first be willing to shed their extreme cautious approach to lending. 

The challenge lies here. One is not quite sure if enough is being done in this direction just yet.