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RBI's mini package for arresting the slowdown in the economy

Anand Adhikari     August 8, 2019

While finance minister Nirmala Sitharaman meets industry representatives across battered sectors to get the pulse and solution of the economic slowdown, the Reserve Bank of India (RBI) is doing its bit to prop up a slowing economy. The gross domestic product (GDP) growth, which plunged to a low of 6.8 per cent in 2018-19 is now expected to grow at 6.9 per cent in 2019-20. The growth could plunge even lower as the threat of global slowdown in advanced economies has gained currency amid trade and currency wars between the world's two largest economies US and China. The RBI in its monetary policy has come out with a mini package to boost the economy:

Lower cost of capital

It was the fourth consecutive cut in the repo rate, the rate at which banks borrow from the RBI. The RBI cut the repo rate by 35 basis points to 5.40 per cent. A lower fund infusion from the repo window, which mainly bridges the short-term fund mismatches of the banks, helps them in lowering the overall cost of funds. In the last six months, the RBI under the new governor Shaktikanta Das has reduced the repo rate by 110 basis points. Excluding today's rate cut, the reduction in the repo rate amounted to 75 basis points. However, banks have only transmitted 29 basis points cuts to new borrowers in terms of reduced lending rates. The lower interest rate regime will eventually benefit existing borrowers as banks are also cutting deposit rates. In addition, the sovereign bond issue, if it comes, will also help in better transmission as the government borrowing is likely to reduce in the domestic market, leaving more funds for the private sector.

Assuring market of more liquidity

The RBI has been providing more liquidity in the market. The liquidity is already in surplus mode. The RBI 's accommodative stance is a big indicator for the money market for ample liquidity.  The RBI has claimed that there is a return of currency to the banking system. There is also drawdown of excess cash reserve ratio balances by banks.

More funds to NBFCs

The RBI is making all efforts to increase the fund flow to non-banking financial companies (NBFCs), which are struggling to raise resources from the market. The central bank has now decided to raise bank's exposure limit to a single NBFC from 15 per cent to 20 per cent of their core equity capital. This measure will release more funds from banks to NBFCs. In addition, the Budget 2019 has provided an insurance of sort for losses up to 10 per cent in NBFC portfolio buying by public sector banks (PSBs). This cover is available up to Rs 1 lakh (portfolio buying) for PSBs.

Boost to consumer credit

Personal loans, which are always unsecured, attract a higher risk weight of 125 per cent. A higher risk weight means a higher portion of capital getting allocated to a loan. The RBI has decided to reduce the risk weight from 125 per cent to 100 per cent for personal loans. This will encourage banks to have more exposure in unsecured personal loans with lesser capital being allocated to such loans. This will boost consumption as personal loans are mostly used for consumption purposes. Currently, banks are writing more personal loans and credit card business, which are not only high yielding, but also has a lower share in the book. There is a scope to have a larger share of such loans.

More flow to agriculture, affordable housing and MSMEs

NBFCs  have played a big role in reaching out to unbanked and under-banked customers and segments. Banks do support NBFCs in a big way by lending and also by buying asset portfolio from them. The RBI has now allowed banks to on-lend through NBFCs for priority sector. The RBI has now allowed banks lending to NBFCs for on-lending to agriculture up to Rs 10 lakh, MSMEs up to Rs 20 lakh and housing up to Rs 20 lakh per borrower (up from Rs 10 lakh). These measures will provide much-needed funds to NBFCs in these difficult times and achieve the RBI's objective of serving people who are unbanked.

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