Page 12 - Banking Finance October 2020

RBI CORNER

squeezing their margins, thus making structural and frictional issues which have come to a halt due to liquidity
it difficult for these MFIs to ensure dampen the transmission of monetary crunch.
operational sustainability and also hin- policy. According to Anuj Puri, Chairman of
dering them to serve the clients in a The impediments to transmission are Anarock Property Consultants, the
more effective manner.
many, but the scourge of high NPAs of RBI's move to permit banks for restruc-
Dayal said Sa-Dhan's suggestions for banks has played a major role in block- turing of loans of real estate compa-
calculation of cost of funds subject to ing the transmission. nies at the project level rather than the
the pricing cap of 26 percent is a bid In an environment of sustained asset entity level is "indeed a good move".
to protect the small and medium MFIs quality stress impacting the capacity of "It will help restart projects which
from base rate fluctuations and banks to lend, the government has in- have been stuck due to the impact of
thereby helping them to maintain op- fused capital in public sector banks to the COVID-19 pandemic. Both buyers
erational sustainability. improve their capital position and fa- and developers will stand to gain when
stuck projects will eventually see the
The suggested measures will keep the cilitate credit extension, it noted.
light of the day," he said.
small and medium MFIs afloat which is The RBI has also deferred the imple-
important to service MFI clients in mentation of the last tranche of Capi- He noted that from a buyers' stand-
unreached pockets, Dayal said. tal Conservation Buffer (CCB) up to point, they will no longer have to wait
April 1, 2021 to provide some respite for an indefinite period for their homes.
As for developers, they will get the
Higher NPAs hinder mon- to banks facing difficulty in raising ad- requisite liquidity to eventually com-
etary policy transmission: ditional capital in a situation of already plete their projects.
high provisioning requirements due to
RBI asset quality corrosion. Overall, it will ease liquidity within the
High incidence of non-performing as- cash-strapped real estate sector which
"Though these measures have helped was already struggling even before the
sets (NPAs) in banks acts as a major some public sector banks to come out pandemic set in. COVID-19 had only
roadblock in transmission of monetary
of regulator''s critical purview, the bank worsened its woes further, Puri noted.
policy actions of the Reserve Bank, a credit grew by only 13.4 per cent in
working paper prepared by the officials 2018-19 and 6.1 per cent in 2019-20," He, however, said that, although the
of the central bank said. RBI has given its nod to the banks, it will
the paper said. have to be seen see how different banks
The working paper also made a strong The paper examines the role of bank carry this forward. According to RBI,
case for capital injection in state-owned capital in monetary policy transmission the requirement of an inter-creditor
banks, arguing that such a move would
in India during the post-global financial agreement (ICA) in respect of the en-
increase the credit flow to the real sec- tity to which lending institutions have
crisis period. It finds evidence of exist-
tor in addition to ensuing smoother exposure is a basic feature of Pruden-
ence of bank capital channel of mon-
transmission of monetary policy. etary policy transmission for India. tial Framework for Resolution of
"Presence of non-performing assets in Stressed Assets dated June 7, 2019, and
a bank also weakens monetary policy RBI's loan recast frame- consequently that of the resolution
transmission and lowers the loan framework for covid-related stress.
growth rate," said the working paper work to support Covid-hit "There is sufficient flexibility to the
co-authored by Silu Muduli and realty projects lending institutions to formulate ICAs
Harendra Behera, Department of Eco- in respect of a legal entity to which
The Reserve Bank of India's frame-
nomic and Policy Research (DEPR), RBI. they have exposure that address the
work for loan recast or stress resolu- specific requirements of each borrow-
The RBI said the views expressed in tion for the Covid-19 related stress ers on a case to case basis, including
the paper are those of authors and not which allows banks to restructure loans designing different resolution ap-
of the Reserve Bank of India. of real estate companies at the project proaches for different projects under
The working paper titled ''Bank Capi- level comes as a major relief for devel- the same borrower within an ICA," RBI
tal and Monetary Policy Transmission opers who have been hit amid the said in its FAQs on Resolution Frame-
in India'' said banks often face many pandemic and their specific projects work for Covid-19 related stress. T

12 | 2020 | OCTOBER | BANKING FINANCE