RBI Governor Shaktikanta Das congragulated his central bank colleagues following the development. “RBI Twitter account reaches one million followers today. A new milestone. Congratulations to all my colleagues in RBI,” Das said in a Twitter post.

Currently, the RBI handle is followed by as many as 10,00,513 people around the world.

RBI Twitter account reaches one million followers today. A new milestone. Congratulations to all my colleagues in RBI.

— Shaktikanta Das (@DasShaktikanta) November 22, 2020

RBI now has more Twitter followers than the US Federal Reserve and the European Central Bank. The world’s most powerful bank in the world US Federal Reserve has 6.77 lakh followers while the second most powerful one ECB had 5.91 lakh followers on Twitter.

RBI’s achievement is commendable, considering that the 85-year old central bank was latecomer on Twitter. Its account was created in January 2012, much later than the Twitter handles of US Federal Reserve and the European Central Bank (ECB).

The second most followed central bank on Twitter is the Banco de Mexico with 7.74 lakh followers, followed by Bank of Indonesia with 7.57 lakh followers.

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The mission of the Reserve Bank is to build confidence in the market and the economy in times of crisis. After a three-days long review meeting of the monetary policy the announcement by Governor of the Reserve Bank of India Shaktikant Das reflected the expectations of a central bank of a country.

The Reserve Bank of India has limitations on what can be done by the Central Bank of a developing country as it is impractical to print currency as some of the world’s major economies have done. Central banks in the US, Japan and Europe printed currency and marketed it during the post-COVID crisis. Such endeavour is not practical in a country like India.

The announcements made after the Monetary Policy Review meeting show that the Reserve Bank has done a lot in the current situation. Banks have not been put under much pressure but have taken balanced steps that can be adopted now. Shaktikant Das has said that the announcement to ensure liquidity will follow. This is a decision that will stimulate the economy and the market.

The Reserve Bank of India has decided to keep the repo rate and reverse repo rate unchanged. The current repo rate is four per cent. The repo rate was last reduced in May. It is not possible for the Reserve Bank to cut rates in the face of rising inflation. At present the inflation rate is 6.09 per cent. The Reserve Bank of India has adopted measures to control inflation between 2 per cent and 4 per cent. Therefore, it does not appear that the Reserve Bank will be prepared to cut rates further without reducing inflation.

Shaktikant Das said measures would be announced to increase liquidity, ease financial pressure and increase lending to the market. The announcement that medium and small micro enterprises will be given the opportunity to restructure their loans is an important one. The committee, headed by former ICICI Bank CEO K.V. Kamath, will recommend ways to restructure loans of companies. A special window will be opened for loan restructuring. This is a step towards sustainability for small and micro enterprises in crisis.

The earlier condition was that the gold loan should not exceed 75 per cent of the market value of the gold. The Reserve Bank has decided to increase this to 90 per cent. The aim of this decision is to help increase liquidity and credit to people faced with job losses and fall in income. This proposal will help in creating more funding through means such as gold loans, which are used by those who are facing job losses and income leakage. Since it is often impractical to sell gold at a high price, getting a loan of 90 per cent of the price of gold will allow households to use their gold for more financial transactions. The core of the Reserve Bank’s announcements today is to ultimately create more liquidity for companies and the general public, thereby reviving the market.

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The Reserve Bank of India (RBI), in its monetary policy committee (MPC) meeting on Thursday, has decided to keep its key lending rates (repo and reverse repo rates) unchanged.

The central bank decided to keep the repo rate at 4% and reverse repo rate at 3.35% mainly on inflation concern.

RBI fears, amid the COVID-19 crisis, the retail inflation in India, especially food inflation, may shoot up in this quarter (July-September period) due to supply disruptions, rural distress and poor economic recovery. Though policy makers paint a rosy picture on Kharif (monsoon) food production, retail inflation is likely to breach RBI’s target of 2% to 6%.

“RBI acted judiciously by keeping the rates unchanged. The surplus liquidity in the banking sector and expectation of inflation rate to remain at the elevated levels in Q2FY21 guided RBI’s decision. One of the major announcements was with regard to raising loan to value ratio (LTV) for gold from 75% to 90%. This would be beneficial to the Indian households in the wake of rising gold prices,” said Deepthi Mary Mathew, economist at Geojit Financial Services.

Though hailed as a deft move to infuse liquidity in the hands of ordinary people, RBI’s decision to raise LTV does not cover the Non-Banking Finance Companies (NBFC), which are playing a major role in the gold loan segment. A leading NBFC in Kerala, when contacted by The Gulf Indians, said they are waiting for clarity on the issue. “Only banks and regional rural banks are allowed to lend up to 90% of the gold value. We are awaiting clarification,” it said. Are they expecting a surge in additional gold loan demand as existing customers can borrow 15% more against their pledged assets? “We are not expecting a higher demand for additional/top-up loans from existing customers as gold is a very precious commodity and people will mortgage it only for the required amount. And they wish to take it back as early as possible,” said the NBFC company.

In the last seven months since February, the MPC has cut the repo rate by 115 basis points (bps). It is the rate at which RBI gives money to the banks. Reverse repo is the rate at which RBI accepts surplus/reserve cash from banks.

RBI Governor Shaktikanta Das also announced decision to extend resolution plan for COVID-affected retail borrowers. He has appointed a committee, headed by eminent banker K.V. Kamat, to suggest ways to implement the scheme. Earlier, moratorium on loan repayments was allowed till this month. Now the moratorium can be extended till December if the loan account is classified as standard and not in default.

“The central bank has preferred to play it safe with a pause even while reiterating that further space is available for more monetary action. The setting up of K.V. Kamat committee to advise on resolutions is an excellent decision,” V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, told The Gulf Indians.

The RBI governor said Rs.5,000 crore will be provided to National Housing Bank (NHB) and it will be for one year, to be charged at the repo rate. A loan resolution plan, which consists of payment moratorium of up to two years for corporate and personal borrowers, will also provide a breather to real estate developers and individuals.

“For the year 2020-21, as a whole, real GDP growth is expected to be negative. An early containment of the Covid-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks,” the MPC said in its statement.

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Rating agencies and financial research institutes estimate that Indian banks will have to raise between Rs.15,000 crores and Rs.37,500 crores over the next two years in the wake of the impact on the COVID-19 economy. They point to the need for additional capital mobilisation in view of the potential for banks’ non-performing assets to grow and growth to slow.

Private banks have already moved into new transactions to raise deposits. Which way will the public sector banks, which been generally weak and, to say it colloquially, in a pregnant state’, resort to raising capital?

Leading private sector banks such as Axis Bank and Kotak Mahindra Bank are actively pursuing the mission of attracting investments. Carlyle Group, a global private equity firm, has invested Rs. 7,500 crores in Axis Bank. Kotak Mahindra Bank has raised Rs.7,460 crore through QIP (Qualified Institutional Placement).

At the same time, raising funds for public sector banks is not easy. Experts point out that public sector banks will need an additional Rs.1.5 lakh crore in capital. The government, which is facing a high fiscal deficit due to the revenue drought created by COVID-19, has limited support for public sector banks. The government has invested Rs.3.5 lakh crore in public sector banks in the last five years. No additional capital has been allocated to public sector banks in the last budget or the recently announced financial package.

In such a situation, one way is to mobilise investment through the capital market. The money raised by the government through bonds can be deposited in banks. The government has already resorted to this method. But the question remains as to how much money can be raised in this way from a market with very limited liquidity.

Another way is to privatise public sector banks. Years ago, a Reserve Bank committee headed by former Axis Bank chairman P.J. Nayak had suggested that reducing the government’s stake to less than 50 per cent was a way to increase the efficiency of public sector banks.

Public sector banks are in a situation where they are prone to sinking like a ship due to over-indebtedness and loss-making cracks. To prevent them from sinking, the government can take steps to sell the shares while maintaining a significant shareholding so as not to lose control. Bringing professionals into management from the private sector can also be a cure for the disease of mismanagement.

But even if the government is willing to sell the shares, it remains to be seen how much money can be raised through it in the current situation. Public sector banking was one of the worst hit by the stock market crash. The share price of public sector banks is currently much lower than the book value. Their share price is only 0.3 times to 0.8 times the book value. At the same time, the value of shares of private banks is still high. For example, Kotak Mahindra Bank trades at 4.7 times its book value.

It is difficult to raise the required capital through the sale of shares of public sector banks which have been devalued due to the decline in the market. Currently, even SBI, the largest public sector bank, has a market cap of just Rs.1.71 lakh crore. Shares of most public sector banks are trading at the lowest level in the last seven to ten years.

Another way is to set up an institution called ‘Bad Bank’ and redistribute the entire credit burden of the banks to it. A bad bank is an institution set up to clear the banks of all their bad debts. Bad bank will handle the burden of bad credit from then on. The only job of a bad bank is to reorganise assets. Consideration should be given to the use of asset restructuring options in the event of a long delay in the completion of the proceedings under the Pauper Act of the National Company Law Tribunal.

The job of the bad bank will be to reorganise the assets only. Consideration should be given to the use of asset restructuring options in the event of a long delay in the completion of the proceedings under the National Company Law Tribunal under the Pauper Act.

By transferring the bad debt to an institution like Bad Bank, the banks can replace the old canvas and run the loan business as smoothly as painting a new one. The old losses can be offset by the profits from the loan business. While bad credit is not eliminated, technically removing credit from the balance sheet will give banks more time to resolve issues.

In countries such as Sweden, Finland and Ireland, the practice of setting up bad banks to address the credit crunch of financial institutions has been adopted. In Asia, South Korea and China have adopted this method.

But the question remains whether the government will have to rely on the exchequer for the capital to create the new bad bank system. One way is to issue bonds for bad bank capital. Another important hurdle would be the valuation of the assets to be transferred.

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