RBI presses the pause button on rates, but will allow one-time restructuring of loans

After cutting the repo rate by 115 basis points since the outbreak of the Covid-19 pandemic, the Monetary Policy Committee (MPC) unanimously decided to hit the pause button due to the uncertainty surrounding the inflation outlook.

The Reserve Bank of India, however, announced a slew of measures aimed at improving liquidity for micro enterprises and alleviating the stress on the balance sheet of companies due to the pandemic.

“Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold, while remaining watchful for a durable reduction in inflation to use available space to support the revival of the economy,” said RBI Governor Shaktikanta Das.

The MPC expects the headline inflation to remain elevated in the second quarter (July-September) of 2020-21, but sees it easing in the second half :(October 2020 to March 2021), aided by favourable base effects, he added.

The repo rate (the interest rate at which the RBI provides liquidity to banks to overcome short-term mismatches), thus, continues to remain at 4 per cent. This rate has been cut twice by a cumulative 115 basis points since March in view of the deteriorating growth outlook for the economy.

Relief to borrowers, banks

The central bank’s big ticket announcement today was allowinglenders to implement a one-time loan restructuring plan without any change in ownership, while classifying such exposures as standard assets. This is expected to provide relief to borrowers, whose cash flows have been strained due to the impact of the pandemic, and stem the rise in bad loans for the lenders.

The RBI is setting up a panel headed by KV Kamath to prepare guidelines for this facility.

‘Industry encouraged’

Uday Kotak, President of CII and MD and CEO of Kotak Mahindra Bank, said, “Industry is encouraged by the RBI’s decision to provide a window under the Prudential Framework to enable lenders to implement a resolution plan in respect of their corporate exposures, with the necessary caveats in place. It is to be hoped that the expert committee led by KV Kamath will come out with norms that will enable banks to judiciously monitor businesses while enforcing timely payments as per the restructuring plan. Sectors that are highly stressed due to the impact of Covid are in dire need of such restructuring.”

SBI chairman Rajnish Kumar said the RBI has addressed the need to offer some form of restructuring facility for standard accounts that are facing difficulty in debt restructuring. “We welcome the fact that a new Resolution Framework for Covid-19-related stress facility has been extended to large corporates, SMEs and personal loans with necessary safeguards in each segment,” he said.

Negative GDP growth

The six-member MPC noted that in an environment of unprecedented stress, supporting recovery of the economy assumes primacy in the conduct of monetary policy.

According to MPC’s estimates, the real GDP growth in the first half of the year will remain in the contraction zone. For the year 2020-21 as a whole, real GDP growth is also expected to be in negative.

“An early containment of the Covid-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks,” the Governor said.

More gold loan

In other key moves, the RBI also enhanced the amount of loan that banks can give against gold ornaments and jewellery for non-agricultural purposes from 75 per cent of the value of gold pledged to 90 per cent.

The RBI also announced ₹10,000 crore of additional liquidity to Nabard and the National Housing Bank to help NBFCs and the housing sector tide over the liquidity crisis.