Important measures announced in Statement on Developmental and Regulatory Measures dated August 6

In the second bi-monthly monetary policy statement announced on Thursday (dated 06.08.2020), The RBI Governor said that while he is outlining the following main measures, the Statement on Developmental and Regulatory Measures which addresses them in greater detail.

1. Additional Special Liquidity Facility (ASLF)

Governor announced additional special liquidity facility of ₹10,000 crore will be provided at the policy repo rate consisting of  Rs.5,000 crore to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs), and Rs.5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress being faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in obtaining access to liquidity.

2. Constitution of Shri K.V. Kamath committee to make recommendations regarding Resolution Framework for COVID-19-related Stress:

According to the RBI statement, it will form an expert committee headed by Shri. K.V.Kamath. The committee shall make recommendations to the RBI on the required financial parameters, along with the sector-specific benchmark ranges for such parameters, to be factored into resolution plans. “The parameters shall inter alia cover aspects related to leverage, liquidity, debt serviceability etc. The expert committee shall submit a list of financial parameters and the sector-specific desirable ranges for such parameters to the Reserve Bank, which, in turn, will notify the same, along with modifications, if any, within 30 days,” The Expert Committee shall also undertake a process validation of resolution plans for borrowal accounts above a specified threshold.

Further, RBI to provide a window under the Prudential Framework of June 7^th, to enable lenders to implement a resolution plan in respect of eligible corporate exposures – without change in ownership – as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions , it said. The resolution plan may also include sanctioning of additional credit facilities to address the financial stress of the borrower on account of Covid19 even if there is no renegotiation of existing debt. The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years, it said. Personal loans have also been included in the restructuring except those given to staff of the lending institutions. Accounts which were standard, but not in default for more than 30 as on March 1, 2020 will be considered and the restructuring has to be invoked not later than December 31, 2020 and must be implemented within 90 days from the date of invocation, the statement said. In the light of past experience with regard to use of regulatory forbearance, necessary safeguards have been incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring. The underlying theme of this resolution window is preservation of the soundness of the Indian banking sector, the statement said.

3. Restructuring of MSME debt

 Stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. This restructuring will have to be implemented by March 31, 2021, the RBI statement said.

4. Advances against Gold Ornaments and Jewellery

Further, RBI increased the Permissible loan to value ratio (LTV) for Advances against Gold Ornaments and Jewellery to 90 per cent. This relaxation shall be available until March 31, 2021. Previously, loans sanctioned by banks against pledge of gold ornaments and jewellery for non-agricultural purposes should not exceed 75 per cent of the value of gold ornaments and jewellery.

 5. Banks’ Investment in Debt Mutual Funds and Debt Exchange Traded funds – Capital Charge for Market risk

 As per RBI’s extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital, as compared to holding the same debt instrument through a Mutual Fund (MF)/Exchange Traded Fund (ETF). It has been decided to harmonise the differential treatment existing currently. This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market.

6. Review of Priority Sector Lending Guidelines

The Priority Sector Lending (PSL) guidelines have been reviewed. An incentive framework is now being put in place for banks to address the regional disparities in the flow of priority sector credit. While higher weightage will be assigned for incremental priority sector credit in the identified districts having lower credit flow, a lower weightage would be assigned in identified districts where the credit flow is comparatively higher. PSL status is also being given to start-ups; and the limits for renewable energy, including solar power and compressed bio-gas plants, are being increased.

7. Other measures that are being announced today include:

RBI will introduce an automated mechanism in e-Kuber system to provide banks more flexibility/discretion in managing their liquidity and maintenance of cash reserve requirements. The central bank envisages to put in place certain safeguards for opening of such accounts for borrowers availing credit facilities from multiple banks. This in view of the concerns emanating from use of multiple operating accounts by borrowers, both current accounts as well as cash credit (CC)/overdraft (OD) accounts, the statement said. Further, to encourage responsible innovation by entities in the financial services sector, Reserve Bank will set up an Innovation Hub in India. Further details about the Innovation Hub would be announced in due course it said.

A new mechanism of ‘positive pay’ will be introduced for all cheques of value ₹50,000 and above. This will enhance safety of cheque payments, RBI said. This will cover approximately 20 per cent and 80 per cent of total cheques by volume and value, respectively according to the statement. Operational guidelines in this regard will be issued separately.

A scheme of retail payments in offline mode using cards and mobile devices, and a system of on online dispute resolution (ODR) mechanism for digital payments will also be introduced, the statement said.