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Developmental and Regulatory Policies – Oct 2020: Class Room

It has become a new norm for the RBI to review the developmental and regulatory policies, whenever the Monetary Policy Report is announced after conduct of the Monetary Policy Meeting by the MPC (Monetary Policy Committee). Ever since the onset of COVID, the changes in developmental and regulatory policies attract more attention of the media, analysts and the public including businesses, since they serve as enablers to implement/supplement the policy rate changes. In fact, the governor’s statement on 9^th Oct 2020, was widely read and commented due to the innovations brought in the regulatory policies, though status quo was maintained on policy rates.  I share my understanding on the likely impact.

1.    On Tap TLTRO Facility: up to Rs.100,000 cr. for tenors up to 3 years, available till Mar 31, 201 with flexibility to enhance the amount and extend the last date, depending on the response to the scheme. The banks availing the facility should deploy the funds in corporate bonds, commercial papers, and non-convertible debentures issued by the entities in specific sectors (over and above the outstanding level of their investments in such instruments as on September 30, 2020) and/or as loans and advances to these sectors. Banks are also given the option of reversing the transactions that took place under TLTRO and TLTRO 2.0 for investing under the On Tap.

Background: Since Feb 20, this is the fourth time RBI has come out with long term repo operations for tenors from 1 to three years.  The first one, LTRO, was without any direction on end use and the banks were free to deploy the funds, wherever they deem fit. Total disbursals by RBI under the facility was Rs.125,000 cr., Rs.25000 cr. more than envisaged initially. The second was made targeted LTRO, stipulating that the money received should be invested in investment grade corp. bonds, commercial paper, and non-convertible debenture. The entire offer of Rs.100,000 cr. was availed too. The third one, called TLTRO 2.0, had the covenant that the funds disbursed under the scheme should be deployed in investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs) and at least 50% of that should be in securities/instruments issued by MFIs and NBFCs with assets up to Rs.5000 cr. (separate sub ceilings fixed). However Rs.12850 cr. only could be released (though Rs.50,000 cr. was the target), as banks could not find adequate investment opportunities in respect of the sub segments.

Thoughts: Banks which availed the facility in Feb and Mar 20, when the repo rate was at 5.15 and 4.40 per cent respectively, might well come forward to avail the new scheme as the current repo rate is 4.0%. TLTRO 2.0 could not take off due to non-availability of adequate investment grade instruments in MFIs and NBFCs with asset size of less than Rs.5000 cr. To overcome that lacunae, RBI has permitted to deploy the ‘on tap TLTRO’ in loans and advances, to the sectors to be specified, as well. These two factors along with the details of sectors, which are to be declared ‘specific’ for availing this facility, should decide the success of the scheme.

Suggestion: Under the specific sector to be named or otherwise, any additional or fresh financing by the banks to large industries/PSEs for clearing their overdue payable to MSMEs, should be made eligible for availing the ‘on tap TLTRO’. Since the ‘on tap TLTRO’ is available at repo/floating rate linked to repo, the banks can make this facility available to the said borrowers at a cheaper rate, irrespective of their credit ratings/rates of interest charged on their other loans. Many MSMEs who supply products/services to large industries/PSEs are yet to receive their payments. This will ease the liquidity position of MSMEs perpetually. 

2.    SLR Holdings in Held to Maturity (HTM) category: As against the current ceiling of holding SLR securities in HTM up to 19.5% of NDTL, the banks are permitted to hold SLR securities up to 22% of NDTL in HTM category, provided the excess over 19.5% comprise securities acquired between September 1, 2020 and March 31, 2021.

Thoughts: In view of the expected deep decline in revenues, the government’s borrowing is likely to go up in the second half of this FY. 1% of NDTL is app. Rs.140,000 cr. and 2.5% works out to Rs.3,50,000 cr. With the relaxation, the banks will be able to participate in the government borrowings, without any need for additional provision that might arise if the securities are marked to market. 

3. Open Market operations (OMOs) in State Developments Loans (SDLs): To conduct open market operations (OMOs) in SDLs as a special case during the current financial year.

Thoughts: FM has announced in May that the states’ borrowing limit has been increased from 3% to 5% of GSDP (Gross State Domestic Product) for the year 2020-21, subject to certain conditions. The states can borrow additionally up to Rs.4.48 lac cr. with the above increase. SDLs are mainly subscribed by the banks. With open market operations for SDLs, RBI may acquire the SDLs from the banks and the liquidity can be used to finance the additional borrowings. 

4.    Regulatory Retail Portfolio – Revised Limit for Risk Weight: The threshold for classifying an exposure to a borrower as retail for risk weight purposes has been enhanced from Rs.5 cr. to Rs.7.5 cr. However the revised threshold is only for fresh and incremental exposures.

Thoughts: The risk weight for regulatory retail exposure is 75%. So all existing loans up to Rs.5 cr., enhancements to existing borrowers up to aggregate limits not exceeding Rs.7.5 cr., and fresh loans to new borrowers up to Rs.7.5 cr will carry a risk weight of 75%.  This will benefit the banks, as only less capital is to be maintained for fresh/enhanced exposure up to Rs.7.5 cr.  While this is sure to increase the loans made available to small businesses and individuals (non-housing loans), the benefit of reduced costs on capital maintenance might not be passed on to the borrowers as each bank has its own rating methodologies (internal/external) in pricing the loans to non-individuals and credit risk determinants in the scoring model in respect of loans to individuals. 

5.    Individual Housing Loans – Rationalisation of Risk Weights: So far, differential risk weights are assigned based on the size of the loan as well as the loan to value ratio (LTV). RBI has announced that, risk weight will be linked with LTV only in respect of all new sanctions up to Mar 22, (risk weight of 35 per cent for loans with LTV up to 80% and 50% where LTV is between 80 and 90%)

Thoughts:  As the risk weight is no longer linked to the size of the loan, banks will be more than willing to consider big ticket size loans. This is a real boost to the realty sector, especially projects, where the pricing per flat/villa is in excess of Rs.1 cr. The interest rate may also come down for borrowers anywhere between 10 and 20 basis points. 

6.    RBI has also announced some changes in the following:

(i)            Extending the Co-origination Model (to be known as Co-Lending Model) to cover all NBFCs as a co-lender and all priority sector loans are covered under the Model.

(ii)   Round-the-Clock availability of Real Time Gross Settlement System (RTGS) in line with National Electronic Fund Transfer (NEFT) (NEFT is for remittances upto Rs.2 lacs and RTGS is for remittances above Rs.2 lacs)

(iii)        Perpetual Validity for Certificate of Authorisation (CoA) issued to Payment System Operators (PSOs) instead of issuing the Certificate of Authorisation for specified periods up to five years.

(iv)         Automatic Caution Listing of Exporters, based on Export Data Processing and Monitoring System (EDPMS),  has been discontinued

 

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V.Viswanathan

12^th October 2020