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Highlights of Monetary Policy Committee (MPC) on Feb 5, 2021

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Highlights of 5th Monetary Policy CommitteeThe Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) met on 3rd, 4th and 5th February, 2021 which projected India’s gross domestic Product (GDP) growth at 10.5% for the FY2021-22, 26.2 to 8.3% in H1 FY22 and 6.0 % in Q3 FY22.This is 5th Bi-Monthly Monetary Policy Committee Meeting for FY 2020-21.

  • The projection of Consumer Price Index (CPI) inflation has been revised to 5.2% for the Q4 FY21, 5.2 % to 5.0 % in H1 FY22 and declined to 4.3% by Q3 FY22.
  • The MPC has given the mandate to maintain annual inflation at 4% until March 31, 2021 with an upper tolerance of 6% and lower tolerance of 2% i.e. within a band of +/- 2 %,

The MPC kept the interest rates unchanged the fourth time in a row which are as follows:

Policy Repo Rate 4.00%
Reverse Repo Rate 3.35%
Marginal Standing Facility (MSF) Rate 4.25%
Bank Rate 4.25%

Members of MPC:

Dr. Shashanka Bhide; Dr. Ashima Goyal; Prof. Jayanth R. Varma; Dr. Mridul K. Saggar; Dr. Michael Debabrata Patra; and headed by Shaktikanta Das (RBI Governor).

–Central bank extends TLTRO scheme to NBFCs

On the request of India’s Non-Banking Financial Companies (NBFCs), RBI has included them under the Targeted Long Term Repo Operations (TLTRO). Under this, funds will be provided to NBFCs through banks under the TLTRO on Tap scheme for incremental lending to the specified stressed sectors.

The liquidity availed by the banks under this scheme is deployed in corporate bonds, commercial papers, and non-convertible debentures. Sectors such as retail, micro, agri, infra, MSME, pharma, and healthcare are eligible for fund deployment under the scheme.

Background:

In October 2020, Reserve Bank had announced TLTRO scheme worth Rs 1 trillion to provide liquidity support to various sectors and banks. At that the time, NBFCs had written to the apex bank, requesting to include them as the beneficiaries in the liquidity support scheme.

About TLTRO:

On tap TLTRO is conducted with tenors of up to three years for a total amount of up to Rs 1 lakh crore (Rs 1 trillion) at a floating rate linked to the repo rate. The scheme is available till March 31, 2021.

  • It was initially started with 5 sectors viz. agriculture; agri-infrastructure; secured retail; MSMEs; and drugs, pharmaceuticals and healthcare.
  • In addition to them on October 21, 2020, 26 stressed sectors identified by the Kamath Committee were also brought within the ambit of eligible sectors sectors.
  • The liquidity availed under the scheme can also be used to extend bank loans and advances to these sectors.
  • Investments made by banks under this facility are classified as held to maturity (HTM). Notably the total investment permitted to be included in the HTM portfolio is 25%. But this limit is eligible to TLTRO.

–RBI extends deadline for meeting last tranche of capital conservation buffer by 6 months

The RBI also extended the deadline for meeting the last tranche of capital conservation buffer (CCB) of 0.625% by another six months i.e. from April 1, 2021 to October 1, 2021due to continuing stress on account of COVID-19 pandemic and to aid in the recovery process. This buffer ensures banks to have an additional layer of usable capital that can be used when losses are incurred.

–RBI defers implementation of Net Stable Funding Ratio (NSFR)

Apart from above, it was also decided to defer the implementation of Net Stable Funding Ratio (NSFR) from April 1, 2021 to October 1, 2021 amid COVID-19 stress. The NSFR reduces future funding risk by requiring banks to fund their activities with sufficiently stable sources of funding in a time period of 1 year. It is a component of the Basel III reforms along with Liquidity Coverage Ratio (LCR).

  • The NSFR also defined as the amount of available stable funding relative to the amount of required stable funding.

–Banks Can Deduct Loans to New MSME Borrowers from NDTL for CRR Purpose

The RBI has allowed banks to deduct loans disbursed to new micro, small, and medium enterprise (MSME) borrowers from their net demand and time liabilities (NDTL) for calculation of the cash reserve ratio (CRR). The decision has been taken to incentivise new credit flow to MSME borrowers.

  • Here new MSME borrowers are defined as those MSME borrowers who have not availed any credit facilities from the banking system as on January 1, 2021.
  • The exemption will be available maximum to Rs 25 lakh per borrower for credit extended up to the fortnight ending October 1, 2021, for a period of one year from the date of origination of the loan or the tenure of the loan, whichever is earlier.

RBI extends SLR holdings in HTM category till March 2023

RBI also decided to extend the dispensation of enhanced HTM of 22% up to March 31, 2023 to include securities acquired between April 1, 2021 and March 31, 2022.

  • The Reserve Bank on September 1, 2020, increased the limits under Held to Maturity (HTM) category from 19.5% to 22% of net demand and time liabilities (NDTL) in respect of statutory liquidity ratio (SLR) eligible securities acquired on or after September 1, 2020, up to March 31, 2021.

–RBI to come out with paper on regulatory framework for lenders in MFI space

The apex bank is all set to come up with consultative document “harmonising the regulatory frameworks for various regulated lenders in the microfinance space” in March 2021. It will cover various regulated lenders NBFC-MFIs, banks, small finance banks (SFB) and NBFC — investment and credit companies in the microfinance space.

  • This decision came against the backdrop of the Assam Assembly passing the Assam Micro Finance Institutions (Regulation of Money Lending) Bill, 2020 in December for controlling operations of the MFIs.

This decision by RBI has been welcomed by Microfinance Institutions Network (MFIN). It should be noted that MFIN already has a ‘Code of Responsible Lending (CRL) in Micro-credit’ to bring different regulated entities under a uniform common code for customer conduct. The CRL has 113 signatories, representing 70% of the market.

–RBI to set up expert committee on urban co-op banks

The RBI has decided to set up an Expert Committee (EC) on Urban Co-operative Banks (UCBs) that will provide a medium-term roadmap to strengthen the sector. The constitution of EC and its terms would be announced shortly

  • This formation is a part of the additional measures announced by the RBI to revive the economy with measures relating to enhancing liquidity support to targeted sectors, regulation and supervision, deepening financial markets, upgrading payment and settlement systems and strengthening consumer protection.

–RBI allows Indian residents to make remittances to IFSCs

RBI has permitted Indian residents to make remittances to international financial services centres (IFSCs) established here under the liberalized remittance scheme (LRS). Till now, only global participants were allowed to invest in funds set up in Indian IFSCs.

The move is likely to benefit retail investors, and high net-worth individuals (HNIs).

  • Under the LRS, an Indian individual can send up to $250,000 per year overseas for travel, education and medical care as well as for the purchase of shares.
  • Gujarat International Finance Tec-City Co. Ltd is India’s first IFSC.

–RBI Allows Retail Investors to Open Gilt Accounts; India becomes first country to do so

The retail investors are allowed to access government securities (G-Secs) market both primary and secondary – directly through the Reserve Bank (‘Retail Direct’) along the facility to open their gilt securities account. With this, India has become the first country to do so.

  • A “Gilt Account” means an account opened and maintained for holding Government securities, by an entity or a person including ‘a person resident outside India’ with a “Custodian” permitted by the RBI.

–RBI eases rules for FPI investments in defaulted bonds

In order to further promote investment by FPIs in corporate bonds, it is proposed foreign portfolio investors (FPIs) deploying funds in defaulted corporate bonds will be exempted from the short-term limit and the minimum residual maturity requirement under the Medium Term Framework (MTF).

  • Currently, this exemption was limited for FPI who invest in security receipts and debt instruments issued by Asset Reconstruction Companies and debt instruments issued by an entity under the Corporate Insolvency Resolution Process (CIRP).

–RBI shall issue guidelines on outsourcing of digital payment, settlement related service

To manage the attendant risks in outsourcing and ensure that code of conduct adhered to while outsourcing payment and settlement related service, RBI shall issue guidelines on outsourcing of such services by these entities

–All remaining 18,000 bank branches to be under CTS by September, 2021

It is propose to bring the remaining 18,000 bank branches under the coverage of Cheque Truncation System (CTS) by September 2021 which has been has been extended to all legacy clearing houses by September 2020. This will enhance customer convenience and bring in operational efficiency to paper based clearing system.

–RBI tells operators to set up 24×7 helpline for digital payments by Sep 2021

In order to enhance customer trust in the digital payments ecosystem, major payment system operators are required to set up centralised industry-wide 24×7 helpline for addressing customer queries in respect of various digital payment products. It will also give information on available grievance redress mechanisms.

–RBI announces integrated ombudsman scheme for bank customers

The apex bank has decided to collaborate the existing three separate Ombudsman schemes for banks, NBFCs and non-bank prepaid payment issuers (PPIs) into Integrated Ombudsman Scheme w.e.f June 2021.Under this, centralised processing of grievances will be ntroduced on the lines of ‘One Nation One Ombudsman’ approach.

  • This decision has been taken to ease the process of grievances by enabling the customers to register their complaints under the integrated scheme, with one centralised reference point.

Recent Related News:

i.On December 29, 2020, Reserve Bank of India (RBI) released “Report on Trend and Progress of Banking in India 2019-20” under the broad theme of impact of COVID-19 on banking and non-banking sectors, and the way forward. This report for the year ended June 30, 2020 has been submitted to the Central Government in terms of Section 36(2) of the Banking Regulation Act, 1949.

ii.On January 1, 2021, the Reserve Bank of India (RBI) introduced the RBI-Digital Payments Index (DPI) to measure a growth in digital or cashless transactions across the country. It was released on the lines of the Statement on Developmental and Regulatory Policies as part of the Sixth Bi-monthly Monetary Policy Statement for 2019-20 dated February 06, 2020.

About Reserve Bank of India (RBI):

Formation– 1 April 1935
Headquarters– Mumbai, Maharashtra
Deputy Governors– 4 (Bibhu Prasad Kanungo, Mahesh Kumar Jain, Michael Debabrata Patra, and M Rajeswar Rao)