Banking stocks rallied sharply on April 17 with the Nifty Bank itself rising 6.6 percent after the Reserve Bank of India relaxed NPA classification norms and announced more liquidity measures to support NBFCs, HFCs, and MFIs.
In fact, banking & financial services space lifted market sentiment. Nifty50 itself gained more than 3 percent.
The Reserve Bank of India on April 17 said that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020.
NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers, it added.
Given the risk build-up in banks’ balance sheets on account of firm-level stress and delays in recoveries, banks will have to maintain higher provision of 10 percent on all such accounts under the standstill, spread over two quarters, i.e., March 2020 and June 2020, the RBI said, adding these provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.
Economic activity has come to a standstill during the period of the lockdown, with consequential lingering effects that have unambiguously affected the cash flows of households and businesses. Hence on March 27, the RBI had permitted lending institutions to grant a moratorium of three months on payment of current dues falling between March 1 and May 31, 2020.
“The relaxation of 90 days additional for the classification of NPA would also reduce the stress for the indebted corporates who have cash flows issues due to the pandemic. It will also help them to approach banks for further credit if required,” Raghvendra Nath, MD, Ladderup Wealth Management told Moneycontrol.
In order to ease the liquidity position at the level of individual institutions, the RBI has brought down liquidity coverage ratio requirement for scheduled commercial banks from 100 percent to 80 percent with immediate effect. “The requirement shall be gradually restored back in two phases – 90 percent by October 1, 2020 and 100 percent by April 1, 2021.
Liquidity coverage ratio (LCR) is basically the amount of high-quality assets, basically government-backed securities, that are required to be maintained by the banks as a percentage to their total net cash outflows over the 30 days period.
“The lowering of the ratio enables the bank to have more liquidity and make more investments outside the government security space,” said Raghvendra who feels the RBI moves are very timely and would help reduce the economic stress.
The Reserve Bank also announced several measures to support NBFCs, MFIs and HFCs, especially in a lockdown period that is quite long (started on March 25 and will end on May 3).
The RBI has decided to conduct targeted long-term repo operations (TLTRO 2.0) for an aggregate amount of Rs 50,000 crore and said funds availed by banks under TLTRO 2.0 should be invested in investment-grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 percent of the total amount availed going to small and mid-sized NBFCs and MFIs.
“This will comprise Rs 25,000 crore to NABARD for refinancing regional rural banks (RRBs), cooperative banks and micro finance institutions (MFIs); Rs 15,000 crore to SIDBI for on-lending/refinancing; and Rs 10,000 crore to NHB for supporting housing finance companies (HFCs). Advances under this facility will be charged at the RBI’s policy repo rate at the time of availment,” said the RBI.Along with the above measures, the RBI also reduced the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 3.75 percent with immediate effect and relaxed NPA classification norms.