RBI pumps in more liquidity, but, wary of credit-worthiness of these borrowers, banks may not just lend.
Reserve Bank of India (RBI) Governor Shaktikanta Das has once again unleashed liquidity, this time for NBFCs, farmers, and small businesses. However, not all of it may reach the intended beneficiaries. After all, the targeted long-term repos of Rs 50,000 crore for the NBFCs—large and small—are optional, and if banks believe there aren’t enough investment-grade assets to be bought, they won’t bid for the funds.
Going by the investment pattern for the corporate bond TLTROs so far, the funds have been invested in nothing but the best, mainly AAA and AA+ bonds. So, there is little reason to believe it will be very different for NBFCs. In fact, investment-grade NBFC assets will be harder to come by now, with quality names like Bajaj Finance and Shriram Transport having being downgraded. So, banks are likely to play it extra safe, and as has been the trend, the weaker players will find it very hard to raise funds at an affordable price.
Governor Das should not put in caveats—for instance, he should not insist that banks lend 50% of the TLTRO funds to smaller NBFCs and MFIs because that becomes a disincentive. Instead, why not let the larger, and better-rated NBFCs benefit from borrowing at lower rates? At least that will help bring down corporate bond yields, and interest rates on loans for both SMEs, and individuals. It is a better way to bring down the cost of money, and stimulate demand. If banks are forced to take on risks that they are not comfortable with—such as lending to MFIs, or mid-sized NBFCs—they will continue to shy away from lending altogether. But, the Governor deserves full credit for not pressuring banks to offer NBFCs a loan repayment moratorium.
Already, the three-month moratorium for term-loan customers is going to bruise their balance sheets. The regulatory forbearance—accounts that were standard as of February 29 need not be classified as NPAs for the duration of the moratorium—is of little comfort because they will have to set aside an additional 10% as capital provisions on these loans for the March, and June quarters. As the Governor observed, there is stress building up in bank balance sheets, and it is important they remain healthy. So, it is surprising that RBI has extended the timeline for making an extra 20% provision for a stressed account that hasn’t been resolved from 210 to 300 days. That is simply papering over the cracks, and not desirable either for the lender or the company.
But then, Das has a tough task as he tries to cajole banks to lend. This time, he has dropped the reverse repo rate to a paltry 3.75%, and while he gets full marks for trying, it may work only at the margin. To be sure, a 25 basis points spread is not small, but the risks of lending to the corporate sector today are far bigger; at more than 15 ratings downgrades a day—many to near junk status—it is becoming increasingly difficult to find investment-grade assets. So, it will come as no surprise if banks simply continue to park the money with the central bank, and lower deposit rates—both on savings, and term deposits—to make sure margins don’t take a hit. Since they are not growing the loan book, there is no tearing hurry to garner deposits.
More important, there are prize assets for the picking because it is not as though the central government and states are going to stop borrowing anytime soon; even though states can now borrow 60% more under the ways and means (WMA), the markets should continue to see good supply. Indeed, given how bonds sold off for a brief while immediately after the Governor’s statement, it is clear the markets are not convinced that the government will stick to its borrowing target.
And, until RBI announces more open market operations (OMOs) to buy bonds, or decides it is going to monetise a part of the fiscal deficit, the bond market will remain apprehensive of the government overshooting the borrowing target for FY21. The yield on the benchmark has risen about 30 basis points so far in April, even though RBI slashed the repo by 75 bps in late March, and as Governor Das himself pointed out, has injected liquidity to the tune of 3.2% of GDP—roughly Rs 6 lakh crore—between February 6 and March 27. That is how nervous the markets are. And, banks today are clear they are going to preserve capital; the Rs 7 lakh crore parked with RBI, earning just 4%, is evidence of that.
Where Governor Das has really excelled is in not succumbing to pressure from any sector; so, there is no buy-out of corporate bonds by RBI, and no big largesse for real estate developers, except for forbearance for NBFCs on commercial loans that have been delayed. The soft loan to NHB should help bring down the cost of home loans, though, at this point, demand for these would be relatively muted. Nonetheless, small businesses can hope for some cheap credit from Sidbi, and the rural-agrarian community from Nabard. The amounts are modest, but that is good. Capital is too precious to be frittered away.