The LTRO coupled with a cut in the reverse repo rate will incentivise banks to actively lend to those in need of funds.
17 Apr 2020 | 11180 Views | By Shahkar Abidi and Sumantra B Barooah
The automobile industry has welcomed the recent announcement by the Reserve Bank of India (RBI). The recent liquidity boost is likely to benefit the micro, small and medium enterprises (MSME) that are integral to the supply chain. It is pertinent to note that MSMEs constitute over 70 percent of India’s ...
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The automobile industry has welcomed the recent announcement by the Reserve Bank of India (RBI). The recent liquidity boost is likely to benefit the micro, small and medium enterprises (MSME) that are integral to the supply chain. It is pertinent to note that MSMEs constitute over 70 percent of India’s automotive component manufacturing.
Easing the liquidity
In RBI’s stimulus 2.0, Governor Shaktikanta Das announced a spate of measures that is expected to ease the economy and infuse liquidity given the pressure from the extended lockdown to tackle the Covid-19 pandemic . This follows the first set of stimulus that was announced on March 27.
A second set of targeted long-term repo operations (TLTRO 2.0) for an initial aggregate amount of Rs. 50,000 crores will be conducted. This is being done to facilitate funds flow to small and mid-sized corporates, including NBFCs and MFIs, who have been more severely impacted by the disruptions due to Covid-19.
The reverse repo rate has been reduced by 25 basis points to 3.75% from 4.0% with immediate effect, in order to encourage banks to deploy surplus funds in investments and loans.
The Ways and Means Advances (WMAs) Limit of states and union territories has been increased by 60% over and above the limit as on March 31, 2020, in order to provide greater comfort to states. The WMAs are temporary loan facilities provided by RBI to help governments tide over temporary mismatches in receipts and expenditure. The increased limit will be available till September 30, 2020.
Relaxation in compliance
With respect to recognition of Non-Performing Assets (NPAs), the central bank has decided that the payment moratorium period, which lending institutions have been permitted to grant as per RBI’s announcement on March 27, will not be considered while classifying assets as NPAs. This essentially means that the moratorium period will be excluded while considering NPAs for those accounts for which lending institutions decide to grant moratorium or deferment. This means that there will be an asset classification standstill for such accounts from March 1 - May 31, 2020. NBFCs will have the flexibility under the prescribed accounting standards to provide such relief to their borrowers.
Simultaneously, banks have been asked to maintain higher provision of 10% on all accounts whose classification has been put on a standstill as above, so that banks maintain sufficient buffers.
Auto Industry reacts
According to Venu Srinivasan, chairman, TVS Motor Company, the LTRO for NBFCs and micro-lenders is a good tool to ease liquidity without tinkering with policy rates. In a statement he explained, “That coupled with a cut in the reverse repo rate will incentivise banks to actively lend to those most in need of funds and make it affordable for businesses to borrow, address their working capital needs and get back into action as the country opens.”
Vipin Sondhi, MD and CEO, Ashok Leyland seconds Srinivasan when he says that MSME’s are the backbone of Indian industry and form the key element of the product supply chain. In his statement he said, “They will need support from the Government, and some measures to be considered would be - easy access to working capital and liquidity through banks and NBFCs, providing interest free and collateral free loans, introduction of an incentive for MSMEs to help them pay salaries and wages to their employees in these times, extension of the NPA recognition period from 90 to 360 days ensuring that all pending payments to industry/MSMEs are cleared immediately by the government departments and PSUs and lastly, MSMEs can be incentivised to produce medical supplies, with a buy back arrangement from the Government.”
However, CARE Ratings agency in a note said that although TLTRO is a positive for the corporate bond markets, it needs to be seen if banks would invest in the lower rated investment category bonds.