Money & Banking
Economy & Nation Exclusive
RBI Monetary Policy: Here is the trailer, wait for the movie to hit the screens

On most of the significant policy issues—implementation of Basle III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. There is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens

The financial markets in general anxiously wait for this—the Reserve Bank of India’s (RBI) Monetary Policy. The market looks for signals towards policy making by the RBI. However, but for the reduction in policy rates by 50 basis points (bps), on most of the significant issues where banks would like to see direction of policy by the RBI, the policy says—“to be announced”. On most of the significant policy issues—implementation of Basel III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. Therefore, there is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens.

Priority sector:
The Nair Committee’s far-reaching recommendations about priority sector treatment, particularly putting a limit of 5% to bought deals, securitisation and on-lending by banks to the priority sector, has not yet been accepted by the RBI. The policy says that the report has been placed on website of the RBI for comments, and that the RBI will take an action after examining feedback. If there was an immediate prospect of the report being adopted, usually, the policy would have said so. Therefore, it seems, though it may be a pure speculative thought, that the immediate prospect of the report being adopted and implemented, is thin.

Abolition of pre-payment penalty on floating rate home loans:
Contrary to practices in international markets, most home loans in India are on a floating rate basis and it is surprising to many that Indian home lenders continued to charge pre-payment penalties on home loans over the years. Pursuant to the Damodaran Committee recommendations, the policy now declares that in case of floating rate loans, there will not be any pre-payment penalties.

This will usher in two things—first, the home loan market will become far more transparent than it is today. Second, banks will also possibly have some temptation to offer fixed rate loans products, and seek to compensate themselves with a pre-payment penalty. Regrettably, the fixed rate loan market has been completely absent in India. There is a separate mention of constitution of a working group for fixed rate products.
Detailed guidelines about pre-payment penalties are to be issued by the RBI shortly.

Basel III implementation:
By end of April 2012, the RBI will come up with a schedule for implementation of Basel III in the country.

It is notable that Basel III makes several significant modifications over the present approach of Basel II. First of all, apart from the stance of Basel II which is on capital adequacy, Basel III introduces liquidity requirements too—both on short run as well as medium run. In addition, Basel III introduces a counter-cyclicity buffer as also redefines Tier 1 capital.

By end-May 2012, the RBI will also publish its guidelines on liquidity risk management by banks, in tune with Basel standards on liquidity risk management.

Measures pertaining to NBFCs:

  • New regulatory framework for NBFCs:  Pursuant to the recommendations of the Usha Thorat panel, new set of draft regulations for the NBFC (non-banking financial company) sector are to be published by the RBI end-June 2012.
  • Gold loan companies: Gold loan companies have been in the limelight over the recent past, mainly for wrong reasons. It is regrettable that the RBI has allowed this sector to come to a level where it currently is, with some of the companies even tapping the public issue market with huge premiums based on the past performance. Regulatory changes in the recent past surely will not let this performance track record of the past be a proxy for the future.  Recent guidelines limited the LTV (loan-to-value) ratio for these companies to 60%. The present policy makes some significant promulgations for gold loan companies: It sets a limit of exposure of a bank on a single gold loan company to 7.5% of the bank’s capital funds.  In the opinion of the author, this limit will not put curbs on gold loan companies; rather it would only encourage banks to consider lending to these companies. The limit of 7.5% of the bank’s capital funds is quite a huge limit. And this is the limit for one particular bank—therefore; a gold loan company may tie up lines of credit with several banks, and depend on bank funds. If the purpose of the RBI is to tame gold loan companies, the Policy in the present form will only encourage such companies.
  • Committee for lending against gold: A new working group has been constituted i) to assess the trends in demand for gold loans and to study how it has influenced gold imports; (ii) to analyse the implication of gold imports for external and financial stability; (iii) to study the trends in gold price and to examine whether NBFCs extending gold loans have any role in influencing the gold price; (iv) to examine the sources of funds of NBFCs for gold loans, especially their borrowings from the banking system; and (v) to examine the current practices of NBFCs involved in lending against the collateral of gold. In short, it seems that the gold loan companies will continue to flourish after the policy.

Securitisation guidelines:
The securitisation guidelines have been on the anvil for almost two years now—in the meantime, two drafts have been issued.

The policy says that by end of April, the guidelines will be finalised. We have already commented on the likely shape of the new guidelines—our comments may be found at Microfinance Focus.

(Vinod Kothari is internationally recognised as an author, trainer and expert on specialised areas in finance, including securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments, microfinance, etc.)


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Economy & Nation Exclusive
RBI surprises with 50 bps cut in repo, bank rate

Contrary to the expectations of bankers and economists the RBI cut repo rate and bank rate by 50 basis points. This may lead to lower interest rates for home loan, auto loan and corporate loans

The Reserve Bank of India (RBI) on Tuesday surprised everyone by cutting the repo rate and bank rate by 50 basis points (bps) as against the overall expectations of a 25 bps reduction in its annual credit policy. This is the first time after a gap of three years that the central bank has reduced repo rates. The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation, the RBI said. The cut in repo rate will reduce cost of home, auto and corporate loans.

Barclays Capital, in a note, said, "In our view, the RBI's guidance suggests that it has merged a couple of "baby steps" into today's move and will possibly stay on hold for awhile. We believe the central bank will examine the scope for further monetary easing on a case-by-case basis in the coming months, with a bias towards not cutting the repo rate further in the next one to two policy meetings."

The central bank in its monetary policy for 2012-13 cut the repo (the rate at which the RBI lends money to banks) rate to 8% from 8.5% and bank rate to 9% from 9.5%. It, however, left the cash reserve ratio (CRR) unchanged at 4.75% while the reverse repo rate (the rate at which the RBI borrows from banks), with a window of 100 bps with repo rate, automatically stands adjusted at 7%.

RBI, in a release, said it decided to raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1% to 2% of their net demand and time liabilities (NDTL) outstanding at the end of second preceding fortnight with immediate effect.

Indicating that there is limited space for further reduction in policy rates, the central bank said, “Persistent demand pressures emerging from inadequate steps to contain subsidies as indicated in the recent Union Budget will further reduce whatever space there is. In this context, it must be pointed out that, while revisions in administered prices may adversely impact headline inflation, the appropriate monetary policy response to this should be based on whether the higher prices translate into generalised inflationary pressures.”

“By shifting a stance towards favouring growth and cutting repo rate by 50 bps at a one go, RBI has certainly come up with the trick that is actually required at the moment. However, risks to inflation discussed in the macroeconomic report are some of the concerns that may act as a hurdle in the course of loosening of monetary policy,” said DK Aggarwal, chairman and managing director of SMC Investments and Advisors.

Speaking on effects of the RBI policy on real estate, Om Ahuja, chief executive for Residential Services at Jones Lang LaSalle India, said, "We do expect that there will be a marginal increase in home loan borrowings because of this positive move. That said, the series of hikes in the past have also affected the price that builders put on their properties, since their own cost of borrowing has increased. It is unlikely that property prices will come down because of this rate cut, and it is the price of properties that is the decisive factor in residential real estate sales. In fact, it is very likely that there will be an upward bias on property rates because of the anticipated improvement of sentiments with buyers who have so far been sitting on the fence, waiting for some signals of relief."

Last month, the RBI slashed CRR—the percentage of deposits that banks have to keep with the RBI—from 5.5% to 4.75%. With this, the central bank had infused Rs48,000 crore into the economy. Showing persistent sluggishness in the economy, industrial production growth slowed to 4.1% in February this year, mainly due to poor performance of the manufacturing sector and consumer goods segment.

At the same time, inflation has been hovering around 7% and global crude oil prices are still over $100 per barrel, adding to inflationary pressures. Inflation was 6.89% in March much above the RBI's comfort level.

Mushtaq Ahmad, chairman, Jammu & Kashmir Bank, said, "When we are expanding our corporate and SME loan book outside the J&K State, the rate cut scenario will allow us generate volumes, customer base and remain competitive. We will be happy to pass on the benefit of cut to borrowers. Though seemed temporary, the initiative is an act of re-balancing towards checking inflation.”

RBI, which increased the key policy rate 13 times between March 2010 and October 2011 to tame inflation, did not hike the repo rate (short term lending rate) in the last three policy reviews.

On the other hand, India's GDP grew by the slowest pace in the last three years to just 6.1% in the third quarter of 2011-12.
The GDP growth rate for the third quarter was lower compared to 6.9% in the previous quarter and 8.3% in the same quarter last financial year.

Since October 2011, the repo of RBI has stood at 8.5%. Repo rate is the signalling rate. Other policy rates like reverse repo and bank rate adjust automatically with change in the repo rate.

Inflation was the key driver that guided the Reserve Bank to tighten money supply, and later hold rates during the past 36 months. The period also saw it inflicting 13 simultaneous hikes, by 3.75% in repo rates over the 19-month period, making it one of the most aggressive central banks in the world.

Apart from hurting investment activity, the rate hikes severely hurt the retail borrowers as higher loan repayments put household budgets for a toss.

RBI made a conscious effort at placating this class by reiterating that banks should not charge pre-payment penalties from home loan borrowers. It also announced to set up a working group to assess the possibility of having long-term fixed interest products which will not be exposed to interest rate changes.

The followings are the highlights of the Annual Monetary Policy for 2012-13 announced by RBI Governor D Subbarao on Tuesday...

  • Short term lending rate (repo) lowered by 0.50% to 8%
  • Cash reserve ratio retained at 4.75%
  • GDP growth for 2012-13 projected at 7.3%
  • March-end, 2012-13 inflation expected at 6.5%
  • Bank rate cut by 0.50 pc to 9%
  • Deposit growth pegged at 16%, credit growth at 17%
  • Upside risk to fiscal deficit target of 5.1%
  • Govt borrowing may decrease credit flow to pvt sector
  • Liquidity conditions moving towards comfort zone
  • To issue final guidelines on Basel III by May 2012
  • Tightens norms for lending against gold by NBFCs
  • Next mid-quarterly monetary review on 18th June




5 years ago

For Mumbai and Delhi based builders pigs are flying after RBI rate cut. Actually for prospective home buyers home price is bigger hurdle and matter of concern than interest rate / EMI. Rs. 3000-5000 up/down in EMI does not matter to most of the home buyers in metro cities. So sweet dreams to Mumbai and Delhi based builders keep dreaming about property sell and get bankrupt.

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