The Reserve Bank of India (RBI) ended the moratorium on loan repayment and launched a debt restructuring plan as a first step towards nudging industry and banks to return to normal life while retaining unchanged interest rates, juggling the need to shore up the COVID-hit economy with inflation watchfulness.
The Monetary Policy Committee (MPC) unanimously supported the levels status quo in the midst of strong market pressures but acknowledged the need for action to sustain economic development, which remains vulnerable following the Covid-19 pandemic and subsequent closures.
"The MPC has agreed to adopt an accommodative policy as long as it is appropriate to boost growth and reduce Covid-19's effect on the economy while ensuring that inflation remains within the future target," the RBI said. "These decisions are in line with the goal of achieving the 4% inflation target for the medium-term consumer price index (CPI) within a +/-2% point band, thus promoting growth."
Surplus liquidity in the financial system is also driving down corporations' borrowing rates which could be adequate as a resource to support lenders for the time being.
“While space for further monetary policy action is available, it is important to use it judiciously to maximise the beneficial effects for underlying economic activity,” the RBI governor Shaktikanta Das said. "At the same time, the MPC is conscious of its medium-term inflation target.”
RBI Governor Shaktikanta Das actually has a difficult mission in his hands. He must overcome the problem of growth-inflation and even ask for a second time if the country wants a moratorium extension and whether there is a need for a one-time recast of other loans.
RBI Governor Shaktikanta Das actually has a difficult mission in his hands. He must overcome the problem of growth-inflation and even ask for a second time if the country wants a moratorium extension and whether there is a need for a one-time recast of other loans.
Some bankers have been pressuring RBI to allow a one-time reform of loans to solve the issues of non-performing assets (NPA) that may soon arise in the coming quarters, as suggested in the RBI Financial Stability Report.
RBI may admit, in its commentary, that in the near term the inflation trajectory may remain around 6%. It may also acknowledge that the rate cut transmission is steadily gaining pace, said analysts, but it is not appropriate.
That said, this is what investors would look at in the monetary policy of RBI now.
Cut rates, or not?
Inflation is on the increase, but the economic indicators showed signs of a downward trend of revival in July following a strong recovery in May and June. While economists are not too worried about 6% more inflation, for now, repo rate cuts of 115 basis points and reverse repo cuts of 155 basis points since March have not greatly boosted credit growth, analysts said.
"Rate cuts so far have had little impact on demand stimulation or growth," said Shanti Ekambaram, Group President for Consumer Banking at Kotak Mahindra Bank.
The banking industry's total non-food credit rose 6.7% year-on-year (YoY) in June to Rs 90 lakh crore. It was flat compared to May and less than the 8.4% average growth seen over the past 12 months.
Nirmal Bang Institutional Equities expects the MPC to pause as inflation in the last two quarters has averaged over 6%. Inflation in the consumer price index (CPI) averaged 6.7% in the quarter of March and a little lower 6.5% in the quarter of June.
Analysts in favour of rate-cutting say the unlocking of India is slow, and the RBI's own prognosis indicates increasing stress on asset quality.
"India’s activity has faltered the most among major economies be it visible in car sales, PMI, IIP or imports. While there was some improvement in May-June, the rebound seems to be tapering in July, and that too at very weak levels. The growth revival should be a policy priority, as is the case around the world," said Edelweiss Securities.
Extension of the moratorium?
The silver lining so far has been that banks reporting June quarter results suggest a moratorium drop in loan books compared to March levels (moratorium 1.0), and banks raise funds to meet future requirements. That is not without a caveat, either.
Murthy Nagarajan of Tata Asset Management said there is no standardisation for the basis of classification of loans reflected under moratorium.
"Various banks have their own definition of loans under a moratorium, some banks have classified borrowers who have not paid any of the last four instalments under a moratorium, some banks have classified one loan instalment out of the 4-instalment also as moratorium loans. Based on this classification, the loans moratorium in the books is in 9 -17% range among top-quality banks," Nagarajan said.
ICRA previously estimated that approximately 10-15% of moratorium borrowers (out of 30-40% of the total moratorium borrowing book) had defaulted, with the expected slippage of 3-6% of the advances in the current fiscal year.
"However, with a reduction in loan book under moratoriums a higher percentage of this moratorium book now becomes vulnerable," it said. Nagarajan said that 30% of banks' loan book is for entities rated A and below, and a significant amount of stress in the books of banks is likely after the moratorium is lifted.
Loan restructuring?
A one-time restructuring would appear as an act of “kicking the can down the road”, Spark Capital said in a July note, adding that such an approach may well be inevitable given the uncertain cash flows in certain sectors.
Nagarajan said: "Past experiences have shown 40-50% of the restructured loans have gone bad after 2 years. Still, this is a better solution, given the dire state of these banks, in which they may have to write off 100% of the stressed assets in one go," he said.
"As we await clarity from the RBI on the future course of action, both one-time restructuring and extension of the moratorium could pose challenges to lenders not only in implementing the same but also in their financial stability if the quantum is large. In our view, as the lenders may continue to have discretion on extending the moratorium, a one-time sector-specific restructuring may also create implementation challenges, given the inter-linkages with various sections of the economy," ICRA said.