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Mumbai, August 6, 2020
With COVID-19 infections rising unabated under fragile macroeconomic and financial conditions, the Reserve Bank of India (RBI) today announced additional developmental and regulatory policy measures to enhance liquidity support for financial markets and other stakeholders, among other things.
As part of these measures, the permissible loan to value (LTV) ratio for loans sanctioned by banks against pledge of gold organaments and jewellery for non-agricultural purposes has been increased to 90 per cent as against the extant limit of 75 per cent. This relaxation shall be available till March 31, 2021.
The RBI has also decided to give priority sector lending (PSL) status to start-ups and the limits for renewable energy, including solar power and compressed biogas plants, are being increased as part of a review of PSL guidelines.
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.
RBI Governor Shaktikanta Das told a press conference that the measures would also further ease financial stress caused by COVID-19 disruptions while strengthening credit discipline; improve the flow of credit; deepen digital payment systems; augment customer safety in cheque payments; and 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.
Das said that 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.
He said that the RBI had decided to provide a window under the June 7th "Prudential Framework on Resolution of Stressed Assets" 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 preservation of the soundness of the Indian banking sector," he said.
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," the RBI Governor said.
He said the Reserve Bank is constituting an Expert Committee, chaired by well-known banker K V Kamath, which shall 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.
Das noted that 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," he said.
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.
Other measures announced today include the 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.
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, the RBI has decided to put in place certain safeguards for opening of such accounts for borrowers availing credit facilities from multiple banks.
"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," Das said.
He said that, 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.
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, he added.