News Analysis

RBI 3.0: Some relief for borrowers, but more burden on banks, depositors

Radhika Merwin BL Research Bureau | Updated on May 22, 2020 Published on May 22, 2020

The extension of moratorium could spell trouble for banks without a one-time restructuring window

A cut in policy repo rate, extension of moratorium on loans by another three months, relief for corporates on payment of deferred interest on working capital loans, and increase in banks’ group exposure limit are key measures announced by the RBI to tackle the ongoing pandemic crisis. The third in a series of measures over the past two months, the Central bank’s latest announcements (barring the repo rate cut) are mostly expected supplementary measures, owing to the extension of the lockdown.

With the Covid-19 crisis worsening over the past month and the Centre extending the lockdown several times, the RBI stepping in to take stock of the situation and announcing its monetary policy two weeks ahead of the scheduled date, is indeed welcome. However, by not addressing the key issues of banks around rising risk of delinquencies and HTM (held to maturity) dispensation for government securities held by them, the RBI has left banks wanting for more.

The extension of moratorium on loans by another three months, while a big relief for borrowers, only adds further pressure on banks’ asset quality, in light of the suspension of fresh insolvency proceedings under IBC for one year. The RBI cutting repo rate further by 40 basis points to 4 per cent, has also added further pressure on banks’ margins amid weak credit off-take. How much of a benefit borrowers actually get from the policy rate cut, and in turn lower lending rates, is also unclear given the weak credit demand.

For savers and senior citizens who rely on the humble bank deposits, the repo rate cut spells trouble, as deposit rates (savings rate too) are set to fall further.

Rate cut move

After the sharp 75 basis point cut on March 27, the RBI cut its policy repo rate further by 40 bps to 4 per cent (the lowest over the past two decades was 4.75 per cent in April 2009). Aside from providing a strong boost to sentiments amid the pandemic crisis, the RBI’s rate cut may not offer significant respite to borrowers, who remain wary of taking additional loans.

Along with the repo rate, the reverse repo has also commensurately fallen by 40 bps to 3.35 per cent. Reverse repo rate is the rate at which banks lend short-term funds to the RBI. While the very low reverse repo rate should dis-incentivise banks to park their excess funds with the RBI, the persisting risk aversion will not nudge them to lend more.

For banks: In a normal scenario, the RBI’s rate cut nudges banks to lower their lending rates, which in turn drives credit demand. But amid the ongoing crisis, where banks are risk averse to lending and borrowers are cautious on taking additional loans, credit growth is likely to remain weak. Current credit growth in the system is at about 6-7 per cent. Hence with banks benchmarking their loans against external benchmarks (mostly repo) from October last year, reduction in lending rates on the back of the cut in repo rate is a given.

But sharp fall in lending rates amid weak credit growth will hurt banks’ net interest margins. While PSU banks and few private banks with ample deposit flows can lower deposit rates to safeguard margins, few private banks that have seen deposit outflows (post the YES Bank crisis) may not have much leeway to lower deposit rates.

Reverse repo falling further to 3.35 per cent only adds to the banks’ woes. Since this may not prompt banks to up their lending, lower return on their surplus funds will hurt margins further. In May (upto May 20) banks parked ₹5.7 lakh crore under reverse repo on a daily average basis, which is indicative of the excess liquidity with banks.

For borrowers: Banks had introduced repo-linked loans from October last year. Borrowers whose loans are linked to the repo will see the reduction passed on to them soon (the RBI has mandated that loans are reset at least once in three months). The weighted average lending rate on fresh loans has fallen by 43 basis points (in March alone), but on outstanding loans it has fallen by just 11 basis points (indicative of the weak demand for fresh loans). For old borrowers (pre-MCLR regime or pre-repo-linked loans), fall in lending rates would depend on each banks’ action. One-year MCLR has fallen by about 20-45 bps in most banks between March and April this year.

Hence, borrowers may see a substantial reduction in their EMIs in the coming months, which is good news. But given the uncertainty around jobs, borrowers should take on additional loans only on a need basis and not over-leverage themselves.

For depositors: Sharp cuts in deposit rates have pinched depositors in the past year. Since March this year, fixed deposit rates have reduced by a steep 75-100 basis points (even higher than 1 per percentage point in many banks for specific tenures). The RBI’s reduction in repo rate will prompt banks to cut deposit rates substantially going ahead. What’s more, banks may also look to cut savings rates, which can add to depositors’ woes. The SBI currently offers 2.75 per cent on its savings deposit (upto ₹1 lakh).

Extension of moratorium

As was widely expected, the RBI has extended the three-month moratorium on the payment of instalments on term loans. The RBI had allowed lenders to provide three-month moratorium on term loans, on payment of all instalments falling due between March 1 and May 31. Subsequently it had also provided asset classification standstill for all such accounts from March 1 to May 31.

The RBI has now extended the moratorium by another three months, from June 1 to August 31. This also implies that the asset classification freeze will apply from March 1 to August 31.

The RBI had also allowed deferment of interest of three months on working capital facilities, which is being extended till August 31. Additionally lending institutions are permitted to convert the accumulated interest on working capital facilities over the deferment period (up to August 31, 2020) into a funded interest term loan which can be repaid by March 31, 2021.

For banks: The extension of moratorium is a relief for banks, but it also increases the risk of delinquencies and deterioration of credit behaviour. With the blanket ban on fresh insolvency cases under IBC for a year, extension of the moratorium sans one-time restructuring dispensation, will throw up big challenges for banks. About 30-40 per cent of loans are under moratorium already. In the coming months, more borrowers could opt for relief under the moratorium. With the Covid impact is expected to be long-drawn, banks could face increased stress after the moratorium is lifted in September. By then, stressed borrowers could find it even more difficult to pay the loan (along with the accumulated interest for the six months).

For NBFCs, the extension is a big negative, as banks have not extended the moratorium to all NBFCs. Hence, while NBFCs will have to extend the six-month moratorium to their borrowers, lack of similar dispensation from banks (from whom they borrow), will hurt many of them severely.

On the working capital front, the RBI has now eased the concern of corporates having to pay the deferred interest on working capital loans (six months now) at one go in September, by allowing them to convert the interest into term loan to be repaid by March next year. While the additional time is welcome, given that corporates could remain under stress for the next one year, whether this offers ample relief needs to be seen.

For borrowers: Moratorium is the temporary postponement of payment of interest/ principal/ instalments, and not a waiver of loan repayments. Hence borrowers must remember that the temporary postponement may come to bite them later. With the moratorium now extended by another three months (six month in all), borrowers have to be more cautious while availing the moratorium.

This is because banks will continue to charge interest on the outstanding loan amount at the rate applicable for the respective loan, during the six-month moratorium period. This interest will be added to the principal amount and will lead to the increase in the tenure of the loan. The six-month moratorium (as against three-month earlier) can lead to sharp extension of the loan, which can cost borrowers dearly. In case of credit card dues, the moratorium can pinch borrowers even more given the steep interest rates on dues (upto 40 per cent a year).

Increase in exposure limit

Under the existing guidelines, the exposure of a bank to a group cannot be higher than 25 per cent of its capital base. This has now been increased to 30 per cent on account of the Covid-19 pandemic

For banks: The norms had been introduced to mitigate the risk of banks having huge exposures to groups. Large exposures to a single group (as in the case of IL&FS) could lead to systemic risks for banks, in case of large defaults. Given that these are extraordinary times, some leeway has been given to aid corporates struggling to raise funds. But banks will need to exercise caution while lending excessively to a single group given the evolving risks around Covid. Huge exposures can add to banks’ stress in the next one year.

For borrowers: For companies, it is a positive move, as it will help address their funding needs. But with banks extremely cautious of lending to stressed groups, this will mostly benefit large and well rated companies.

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Published on May 22, 2020
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