Mumbai: The Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 4 per cent. The Reverse Repo rate has also been kept unchanged at 3.3 per cent. RBI governor Shaktikanta Das announced the decision after the end of the Monetary Policy Committee (MPC) meeting.
“On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today has decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 per cent. Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent” said RBI.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward.
The Governor has announced additional special liquidity of Rs 10,000 crore which will be provided at repo rate to National Housing Bank and NABARD.
Meanwhile, Inflation is likely to ease in second half of the current financial year. Monetary Policy Committee expects inflation to remain at elevated levels in July-September, and ease in the second half of financial year, he said.
The GDP growth in the first half of the year is estimated to remain in the contraction zone. For the year 2020-21 as a whole, real GDP growth is also estimated to be negative, said Das.
In a significant decision help the households, the central bank has enhanced loans against gold to 90% of the value from the current 75%.
In a significant decision mitigate the COVID-19 impact on households, the central bank has enhanced loans against gold to 90% of the value from current 75%.
Additional measures announced by RBI
With COVID-19 infections rising unabated under fragile macroeconomic and financial conditions, we propose to undertake additional developmental and regulatory policy measures to (i) enhance liquidity support for financial markets and other stakeholders; (ii) further ease financial stress caused by COVID-19 disruptions while strengthening credit discipline; (iii) improve the flow of credit; (iv) deepen digital payment systems; (v) augment customer safety in cheque payments; and (vi) facilitate innovations across the financial sector by leveraging on technology.
In the worst peacetime health and economic crisis of the last 100 years that we face today, the regulatory response has to be dynamic, proactive and balanced. While designing the major announcements that I am making today, we have ensured that necessary safeguards are in place for preserving financial stability. We are fully mindful of RBI’s responsibility to maintain stability of the financial sector. While I am outlining the main measures, the Statement on Developmental and Regulatory Measures addresses them in greater detail.
(i)Additional Special Liquidity Facility (ASLF) :
Additional special liquidity facility of Rs. 10,000 crore will be provided at the policy repo rate consisting of : Rs.5,000 crore to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs); and Rs.5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity.
Additional special liquidity facility of Rs. 10,000 crore will be provided at the policy repo rate consisting of : Rs.5,000 crore to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs); and Rs.5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity : RBI
(ii) Resolution Framework for COVID-19-related Stress
The “Prudential Framework on Resolution of Stressed Assets” dated June 7, 2019 provides a principle-based resolution framework for addressing borrower defaults. Any resolution plan implemented under the Prudential Framework, which involves granting of any concessions on account of financial difficulty of the borrower, entails an asset classification downgrade except when accompanied by a change in ownership, subject to prescribed conditions.
The disruptions caused by COVID-19 have led to heightened financial stress for borrowers across the board. A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities. This can potentially impact their long-term viability and pose significant financial stability risks if it becomes widespread. Accordingly, it has been decided to provide a window under the June 7th Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures – without change in ownership – as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions.
In the light of past experience with regard to use of regulatory forbearance, necessary safeguards have been incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring. The underlying theme of this resolution window is the preservation of the soundness of the Indian banking sector.
The Reserve Bank is constituting an Expert Committee under the chairmanship of K.V. Kamath which will make recommendations to the RBI on the required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into resolution plans.
The Expert Committee shall also undertake a process validation of resolution plans for borrowal accounts above a specified threshold. The details of the resolution framework are spelt out in Part ‘B’ of the MPC resolution and the circular, both of which will be issued immediately after this press statement.
(iii) Restructuring of MSME debt
A restructuring framework for MSMEs that were in default but ‘standard’ as on January 1, 2020 is already in place. The scheme has provided relief to a large number of MSMEs. With COVID-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support. Accordingly, it has been decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021.
(iv) Advances against Gold Ornaments and Jewellery
As per extant guidelines, loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent of the value of gold ornaments and jewellery. With a view to mitigating the impact of COVID-19 on households, it has been decided to increase the permissible loan to value ratio (LTV) for such loans to 90 per cent. This relaxation shall be available till March 31, 2021.
With a view to mitigating the impact of COVID-19 on households, it has been decided to increase the permissible loan to value ratio (LTV) for such loans to 90 per cent from 75%. This relaxation shall be available till March 31, 2021 : RBI
(v) Banks’ Investment in Debt Mutual Funds and Debt Exchange Traded funds – Capital Charge for Market risk
As per RBI’s extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital, as compared to holding the same debt instrument through a Mutual Fund (MF)/Exchange Traded Fund (ETF). It has been decided to harmonise the differential treatment existing currently. This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market.
(vi) Review of Priority Sector Lending Guidelines
With a view to aligning the guidelines with emerging national priorities and bring sharper focus on inclusive development, the Priority Sector Lending (PSL) guidelines have been reviewed. An incentive framework is now being put in place for banks to address the regional disparities in the flow of priority sector credit. While higher weightage will be assigned for incremental priority sector credit in the identified districts having lower credit flow, a lower weightage would be assigned in identified districts
where the credit flow is comparatively higher. PSL status is also being given to start-ups; and the limits for renewable energy, including solar power and compressed bio-gas plants, are being increased.
(vii) Other measures that are being announced today include:
(a) Introduction of an automated mechanism in e-Kuber system to provide banks more flexibility/discretion in managing their liquidity and maintenance of cash reserve requirements.
(b) While permitting lenders to provide relief to the borrowers through various measures, it is also considered necessary to take appropriate measures for strengthening credit discipline. In view of the concerns emanating from use of multiple operating accounts by borrowers, both current accounts as well as cash credit (CC)/overdraft (OD) accounts, it has been decided to put in place certain safeguards for opening of such accounts for borrowers availing credit facilities from multiple banks.
(c) The Reserve Bank has constantly endeavoured to encourage responsible innovation by entities in the financial services sector. In order to further promote and facilitate an environment that can accelerate innovation across the financial sector, Reserve Bank will set up an Innovation Hub in India. Further details about the Innovation Hub would be announced in due course.
To enhance safety of cheque payments, it has been decided to introduce a mechanism of Positive Pay for all cheques of value Rs.50,000 and above. This will cover approximately 20 per cent and 80 per cent of total cheques by volume and value, respectively. Operational guidelines in this regard will be issued separately.
(d) To enhance safety of cheque payments, it has been decided to introduce a mechanism of Positive Pay for all cheques of value Rs.50,000 and above. This will cover approximately 20 per cent and 80 per cent of total cheques by volume and value, respectively. Operational guidelines in this regard will be issued separately.
(e) A scheme of retail payments in offline mode using cards and mobile devices, and a system of on online dispute resolution (ODR) mechanism for digital payments will also be introduced.