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  1. RBI’s new governor: Four key policies to watch out for from Raghuram Rajan’s successor

RBI’s new governor: Four key policies to watch out for from Raghuram Rajan’s successor

Government has narrowed down its list of candidates to become the next governor of the Reserve Bank of India to four. According to Religare, these 4 key policies will be something to watch under the new RBI governor.

By: | Published: June 28, 2016 1:15 PM
The Economic Survey 2015-16 highlighted that the RBI’s capital adequacy ratio at 32% is much higher than the median 16% ratio of all other central banks. The Economic Survey 2015-16 highlighted that the RBI’s capital adequacy ratio at 32% is much higher than the median 16% ratio of all other central banks.

Government has narrowed down its list of candidates to become the next governor of the Reserve Bank of India to four. The four are current RBI Deputy Governor Urjit Patel, former deputy governors Rakesh Mohan and Subir Gokarn, and State Bank of India Chair Arundhati Bhattacharya.

According to Religare, these 4 key policies will be something to watch under the new RBI governor:

1) Tapping RBI’s excess funds for PSU bank capitalisation: The Economic Survey 2015-16 highlighted that the RBI’s capital adequacy ratio at 32% is much higher than the median 16% ratio of all other central banks. The government has stated that even if the RBI brings down capital adequacy to 16%, it will free up Rs 3tn-4tn for (1) capital infusion into PSU banks and/or (2) the creation of a bad bank to resolve bad loans.

The government has budgeted only Rs 700 billion for capital infusion over four years. Considering the huge gap between the capital required vs. that budgeted, the new governor may agree to use the RBI’s capital for banks.

This creates a clear moral hazard, but proponents of such a move see nothing wrong with the government tapping its own funds for a one-time capital injection under Basel III, says Religare.

2) Operation of stressed asset funds: The RBI, Indian Banks’ Association (IBA) and banks are in the last stage of finalising norms for the operation of stress asset funds in India.

As per media reports, the central bank is against allowing banks to own a majority stake in distressed funds. Also, the RBI believes banks should not contribute meaningfully to stressed funds in the form of debt, as this will do nothing to alter their risk. Additionally, such contributions could involve opaque asset pricing. However, banks are aggressively pushing to be allowed to contribute and/or own stakes in stressed funds.

If permitted by the new governor, this will be negative for the sector as it will mask the true value of write-offs or haircuts required on such assets and prolong the uncertainty over NPAs.

3) Treatment of restructuring and AQR norms: Banks are pitching hard to the RBI for further relaxation of the recently announced restructuring norms ?and the upgrade of certain borderline cases that were classified as NPA under the RBI’s asset quality review (AQR). Any measures which merely push the problem down the road will be negative for the sector, feels Religare.

4) Policy and lending rates: If the new governor cuts policy rates more aggressively than Raghuram Rajan, banks will have to lower lending rates. We do not rule out further changes to MCLR or base rate norms for better transmission of policy rates. If lending rates come off aggressively, banks’ margins will reduce. The correlation between lower rates and higher loan growth or NPAs is very weak.

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