RBI Policy Review: Loans Cheaper Without Rate Cut

Kavya Balaji   /   February 7, 2020
RBI Policy Review: Loans Cheaper Without Rate Cut

The Reserve Bank of India (RBI) in its monetary policy meet on 6th February decided to keep repo rates unchanged at 5.15% as expected. This was because of price pressures remaining elevated. However, the central bank has come up with the range of liquidity tools to fuel the slowing economy. These were a series of measures that included relaxed cash reserve requirements for loans to retail customers and enhanced longer-term liquidity for banks. This is to give a fresh impetus to loan demand and to speed up consumption in the economy. Here are the details you need to know.

Cash Reserve Ratio (CRR)

Banks had to mandatorily set aside 4% of cash for every loan that they provide to retail customers. This included loans for automobiles, housing and loans to micro small and medium enterprise (MSME). In a bid to lower interest rates for these loans and push banks’ credit growth, RBI has relaxed the requirements for banks to maintain this CRR for these loans. The exemption will be for all bank credit to these sectors for a period of six months between January 31 and July 31, 2020. This will lower the funding costs for banks and will incentivize them to lend more.

External benchmark

The RBI had asked banks to link all new floating rate retail loans and floating rate loans to MSMEs to an external benchmark. This was with effect from October 1, 2019. Subsequently, most banks linked their lending rates to RBI’s repo rate. According to RBI, in the October-December 2019 quarter, there was reduction in the weighted average lending rate on fresh loans. While rates for housing loans declined by 18 basis points, there was a 87 bps fall in vehicle loans and 23 bps decline in loans to MSMEs. 

So, now the central bank has extended the External benchmark-based lending rates to loans for medium enterprises. RBI has announced that starting April 1, 2020, pricing of bank loans to the medium enterprises will also be linked to an external benchmark. This is meant to further strengthen monetary transmission and reduce the borrowing costs of these enterprises.

Long-term repo

To improve long-term liquidity, RBI has announced long-term repos. Following on the lines of the European Central Bank’s Long-Term Refinancing Operation, the RBI announced a new long-term repo operations (LTRO) facility. RBI will conduct term repos of one-year and three-year tenors of up to Rs. 1 lakh crore at the policy rate. This will enable banks to borrow cheaply from RBI.

RBI has introduced LTRO to ensure that durable liquidity is available to banks at reasonable cost and to further encourage banks to improve credit flows to productive sectors. RBI said that it will conduct LTRO from the fortnight beginning February 15. This will bring down short-term rates and help boost investments in company bonds.

RBI will also withdraw the daily fixed rate repo and four 14-day term repos that it has been conducting every fortnight. RBI said that it will ensure that there is adequate provision of liquidity as needed because of evolving market conditions — unrestricted by quantitative limits— at or around the policy rate.

This might put pressure on banks to improve their liquidity management rather than depending on RBI. There might be volatility in overnight call money markets once RBI implements this.

Commercial real estate

The RBI has allowed a one-year extension on the date of commencement of project loans provided to the commercial real estate sector. This is for projects that have been delayed for reasons beyond the control of promoters. This extension will be allowed without classifying the loan account as a Non-Performing Asset (NPA).

Earlier lenders couldn’t extend further credit to borrowers classified as NPAs since the guidelines said that any fresh lending be also classified as bad loans. Now, lenders can extend credit to these real estate borrowers. This will help them be in line with other project loans in the non-infrastructure space. Since the repayment cycle for these projects starts from the date of commencement, an extension will allow the companies to use any income in completing the project rather than sticking to repayments.

The RBI will review the regulations for housing finance companies too. RBI recently took over their supervision from the National Housing Bank.

Debt restructuring

The RBI has extended the cut-off date for the MSME one-time debt restructuring scheme till December 31, 2020. This was supposed to be till March 31, 2020. This scheme is meant for loans that were in default but “standard” as of January 1, 2019. This extension will help speed up monetary policy transmission and improve credit flow. This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated Jan. 1, 2019 and the MSME entities which have become stressed thereafter.

However, the eligible loans that can be restructured under the scheme will now been reduced to only those companies that are GST registered. This was not mentioned in the January 2019 circular.

Here’s what each of these measures will mean:

Lower CRRCheaper auto, home and MSME loans
Long-term reposLower funding costs for banks, better loan rates
Extension of debt restructuringRelief for eligible MSMEs
Protection for realty projectsLesser delays in project completion

Look out for lower loan rates from banks in the coming days and keep your eyes on bond yields if you are investing in company bonds.