Highlights of Monetary Policy Committee (MPC) on August 4-6, 2020

To state “2020-21 Resolution of the Monetary Policy Committee (MPC)” a three day meeting of Reserve Bank of India’s (RBI) six-member MPC, headed by Shaktikanta Das was held from August 4-6, 2020 where it was forecasted that India’s real gross domestic product (GDP) will contract in the first half (H1) of FY21 as well as full FY 2020-21 in view of rising inflation and declining of economic growth amid the gradual lifting of COVID-19) countrywide lockdown.

• The central bank kept the repo rate unchanged at 4%, reverse repo rate at 3.35%, and marginal standing facility (MSF) rate and the Bank Rate at 4.25%.

RBI Rates as on Aug 7, 2020

Now, let’s look after the Developmental and Regulatory Policies announced during MPC meet

–Resolution Framework for COVID-19-related Stress: RBI sets up panel under KV Kamath for one-time restructuring of loans

RBI has decided to set up a new mechanism for stressed assets that need rescuing. In this regard, RBI will set up a committee under Kundapur Vaman Kamath, the former chairman of BRICS (Brazil, Russia, India, China and South Africa) Bank and ICICI (Industrial Credit and Investment Corporation of India) Bank to set the parameters and benchmarks for this programme aimed at the resolution of stressed loans.

• This committee will also evaluate resolution plans where debt is more than Rs 1,500 crore.
• Committee Members: Diwakar Gupta, Vice President for Private Sector Operations and Public-Private Partnerships, Asian Development Bank (ADB), N. Manoharan, Chairman, Canara Bank, Ashvin Parekh, Strategy Advisor, Chief Executive Officer (CEO), Indian Banks’ Association (IBA), as the Member Secretary .

It should be noted that this setting up of committee is a part of the Resolution Framework/window which is available for one-time only to the COVID-19 related stressed assets under the “Prudential Framework on Resolution of Stressed Assets” dated June 7, 2019”. The resolution plan may be invoked anytime till December 31, 2020 and shall have to be implemented within 180 days from the date of invocation. Following are its key features:

–Eligibility: Only those borrower accounts eligible for resolution which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020.

–For lenders: The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than 2 years.

• Notably lenders are mandated by RBI to keep additional provisions of 10% of the renegotiated debt after the plan is implemented, as a protection if restructured loans turn bad.
• Lending Institutions also need to sign an inter-creditor agreement (ICA) for resolving accounts with the consent of minimum 75% creditors by value, or 60% by numbers within 30 days from the date of invocation. The regulator has also mandated provisioning of 20% for lenders who do not sign ICA within the said period.

–Conversion: RBI also allowed conversion of a portion of debt into equity and other debt instruments. The debt instruments similar to the loan will be counted as part of the post-resolution debt, whereas the portion converted into other non-equity instruments shall be fully written down.

–Personal Loan: With respect to personal loans, a separate framework will be prescribed. The resolution plan for personal loans under this framework may be invoked till December 31, 2020 and shall be implemented within 90 days thereafter.

–RBI announces additional special liquidity facility of Rs 5000 cr each for NHB & NABARD

NHB: RBI has decided to provide an additional standing liquidity facility (ASLF) of Rs 5,000 crore to National Housing Bank (NHB), over and above Rs10,000 crore already provided,  for supporting housing finance companies (HFCs). The facility will be for a period of 1 year and will be charged at the RBI’s repo rate.

NABARD: An ASLF of Rs 5,000 crore provided to NABARD for a period of 1 year at the RBI’s policy repo rate for refinancing Non-Banking Financial Company (NBFC)- Micro Finance Institutions (MFIs) and other smaller NBFCs of asset size of Rs 500 crore and less to support agriculture and allied activities and the rural non-farm sector.

• A Liquidity support of Rs 25,000 crore was extended to the National Bank for Agriculture and Rural Development (NABARD) in April 2020.

–RBI introduced ASISO facility to help banks manage liquidity in COVID-19 scenario

In view of the disruptions caused by COVID-19, RBI introduced an optional automated sweep-in and sweep-out (ASISO) facility in RBI’s electronic platform e-Kuber to help banks manage liquidity amid COVID-19.

• Under the ASISO facility, banks will be able to set the amount (specific or range) that they wish to keep as balances in their current accounts with the Reserve Bank of India (RBI), i.e. cash reserve ratio (CRR), at the end of the day.
• Participants eligible for availing the Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) will have the option to use the ASISO facility with effect from August 06, 2020.
• This facility will be available on all real-time gross settlement (RTGS) working days between 9 am and 11:30 pm.

–RBI enhanced loan to value ratio to 90% of value of gold pledged

The Central Bank increased the permissible loan to value ratio (LTV) for loans against pledge of gold ornaments and jewellery for non-agricultural purposes from 75% to 90% till March 31, 2021. Means, now banks can lend up to 90% of the gold ornaments value from the existing limit of 75%.

• The hike in LTV on gold loans is to provide relief to borrowers looking to take gold loans to mitigate the urgent financial needs caused by the coronavirus pandemic.
• Notably, this enhanced LTV limit is only for banks and not for gold loan companies.

–RBI extended provisions of restructuring of MSME loans for borrowers with loan outstanding upto Rs 25 cr

The Central Bank also extended the restructuring of Micro, Small & Medium Enterprises (MSME) debt until March 31, 2021 from December 31, 2020, on the condition that the borrower’s account was classified as standard with the lender as on March 1, 2020.

• Also, the aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed Rs 25 crore as on March 1, 2020.
• For accounts restructured under these guidelines, banks need to maintain additional provision of 5% over and above the provision already held by them.
• This decision has been taken in respect of MSME borrowers facing stress on account of the economic fallout of the pandemic.

–RBI to bring start-ups under priority sector lending category

RBI decided to bring startups under the purview of priority sector lending (PSL), a move that will make it easier for startups to raise funds from banks. It will also increase the targets for lending to small and marginal farmers, weaker sections and for renewable energy, including solar power and compressed biogas plants. The revised guidelines aim to encourage and support environment-friendly lending policies to help achieve Sustainable Development Goals (SDGs).

• Sectors that are already under PSL are agriculture, MSMEs, education, housing, social infrastructure among others.
• Eligible entities get access to credit on easier terms from banks under PSL.
• Lenders are also required to assign 40% of adjusted net bank credit or credit equivalent amount of off-balance sheet exposure, whichever is higher, to priority sector.

–RBI to set up ‘Innovation Hub’ to promote financial inclusion, efficient banking

To promote innovation across the financial sector by leveraging on technology into areas such as cybersecurity, data analytics, delivery platforms, and payment services, Reserve Bank will set up an Innovation Hub in India. The Innovation Hub will act as a centre for ideation and incubation of new capabilities which would facilitate and foster innovation.

• This move is on the lines of the RBI regulatory sandbox framework under which 6 proposals were received, the pilot studies or trials of which have been delayed due to the Covid-19 pandemic.

–Positive Pay mechanism for all cheques above Rs 50,000

To further augment customer safety in cheque payments and reduce instances of fraud occurring on account of tampering of cheque leaves, it has been decided to introduce a mechanism of Positive Pay for all cheques of value Rs 50,000 and above.

• Under this mechanism, cheques will be processed for payment by the drawee bank based on information passed on by its customer at the time of issuance of cheq This measure will cover approximately 20% and 80% of total cheques issued in the country by volume and value, respectively.
• The average value of a cheque cleared in CTS presently is Rs 82,000.

What is the Cheque Truncation System (CTS)?

Truncation is the process of stopping the flow of the physical cheque issued by a drawer at some point by the presenting bank en-route to the paying bank branch. In its place an electronic image of the cheque is transmitted to the paying branch through the clearing house, along with relevant information like data on the MICR band, date of presentation, presenting bank, etc. Cheque truncation thus obviates the need to move the physical instruments across bank branches, other than in exceptional circumstances for clearing purposes.

–Scheme of Offline Retail Payments Using Cards and Mobile Devices

RBI permitted small value offline transactions through cards and mobile devices for single payments of up to Rs 200 on pilot basis till March 31, 2021. The scheme is aimed at encouraging customers to opt for digital payments even in those places where the internet connectivity is poor.

• Under the pilot scheme, payment system operators (PSO) banks and non-banks may offer digital payments offline (payments that do not require internet connectivity to take effect)
• Also, the payments can be made using cards, wallets or mobile devices or through any other channel without any Additional Factor of Authentication (AFA)
• The upper limit of a payment transaction shall be Rs 200, although the total limit for offline transactions on an instrument will be Rs 2,000, at any point of time

–RBI to introduce online dispute resolution mechanism for digital payments

RBI also mandated Payment System Operators (PSOs) to implement Online Dispute Resolution (ODR) as there is a concomitant increase in the number of disputes and grievances as digital transactions rise significantly.

• Authorised PSOs are required to implement ODR systems for failed transactions in their respective Payment Systems. Based on the experience gained, ODR arrangements will be extended to other types of disputes and grievances.

–RBI permits banks to invest in debt instruments through mutual funds

RBI has permitted banks to invest in debt instruments through mutual funds or exchange traded funds without allocating additional charges. 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- or Exchange Traded Funds (ETFs).

• The general market risk charge of 9 per cent will apply on both direct holdings, as well as through mutual funds or ETFs.

Points to be noted:

-Reserve Bank’s business assessment index (BAI) for Q1:2020-21 hit its lowest mark in the survey’s history.

-On the financing side, net foreign direct investment moderated to US$ 4.4 billion in April-May 2020 from US$ 7.2 billion a year ago.

-In 2020-21 (till July 31), net foreign portfolio investment (FPI) in equities at US$ 5.3 billion was higher than US$ 1.2 billion a year ago.

-India’s foreign exchange reserves have increased by US$ 56.8 billion in 2020-21 so far (up to July 31) to US$ 534.6 billion – equivalent to 13.4 months of imports.

-Headline inflation may remain elevated in Q2:2020-21, but may moderate in H2:2020-21.

Members of MPC

Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Mridul K. Saggar, Dr. Michael Debabrata Patra.

Recent Related News:

On 19th June 2020, The former governor of Reserve Bank of India (RBI) Urjit Patel was appointed as the Chairman of National Institute of Public Finance and Policy (NIPFP). He will start his 4year tenure on 22nd June 2020 succeeding Vijay Laxman Kelkar, former chairman of NIPFP.

About Reserve Bank of India (RBI):

Headquarters– Mumbai, Maharashtra
Formation– 1 April 1935
Governor– Shaktikanta Das
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, one is yet to be appointed).