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Loan holiday, interest rate reduction essential to tide over coronavirus crisis

Hari Hara Mishra     March 18, 2020

India has been witnessing a slowdown in growth which is now further impacted by COVID-19. Sectors like aviation, tourism, hospitality are hit hard, in addition to sectors like realty, telecom, financial services, automobile which have already been in stress. Social distancing as a policy response has led to partial shutdown affecting all sectors of economy. With wheels of economy coming to a halt, people at the bottom of the pyramid working in various establishments are left marooned without any gainful employment.

The major response has to come from addressing the core issue, containing the epidemic and restoring normalcy. The prevailing view is that it would take at least a quarter to bring normalcy back. A fiscal package is warranted to support the job losses due to halting economy and sector specific revival plans. While heavy lifting is required at government level, monetary intervention is also warranted now for a smooth transition in overcoming the crisis.

The next monetary policy outcome is slated for April 3, well past into a new financial year. This is an emergency, and rightly declared as a national emergency by the largest economy, that is the US. Instead of wait and watch for another two weeks, time is to act now and give effect to the changes in this year's financials.


1. Repayment Holiday/Moratorium

a. One-time repayment holiday for all loans for a 90-day period falling due from March 1, 2020 till May 31, 2020. Amortised interest during the period may be made payable in 9 staggered instalments matching with projected cashflows.

b. The asset categorisation during the period to be treated as Standard and no effect on CIBIL score, etc.

c. Banks/NBFCs may be permitted to book income on accrual basis during the repayment holiday.

2. 65bps interest rate reduction - Repo at 4.5 per cent

Consequent upon substantial reduction in global crude prices, the pressure on inflation is likely to reduce considerably. There is a strong case now for a reduction in interest rate, in line with many global central banks, at least 65 basis points to bring down Repo rate to 4.5 per cent.

If India's interest rate is cut to 4.50, its interest/average inflation ratio will be 0.74, broadly aligned with peer countries like Brazil and Russia.

Admitted, it is too simplistic and rate cut is based on various parameters and future inflation outlook rather than past inflation. The exercise is only for benchmarking against some available set parameters used by Wikipedia.

3. Adoption of an Early Intervention Framework

In the wake of Yes Bank crisis, there is a need to review the supervisory framework based on best practices. There is an existing Prompt Corrective Action (PCA) framework being used now, which triggers regulatory intervention. The PCA consists of three factors like Capital Adequacy, Net NPA and Return on Assets, with certain threshold points for trigger. However, there was no trigger in the recent case of Yes Bank. Hence the need for a rethink if the framework needs review.

There are other frameworks used in other countries, like the one in Denmark reproduced below.

"Early Intervention Framework in Denmark, The Danish framework consists of five quantitative indicators. The supervisor is authorised to take remedial action in cases where the limits are breached. The five indicators are -

(i) Aggregate sum of all large exposures must not exceed 125 per cent of the bank's core capital. (Large exposure is defined as the sum of exposures to a client or to a group of connected clients, if it exceeds 10 per cent of the bank's core capital);

(ii) Bank's lending growth must not exceed 20 per cent per year;

(iii) Amount of lending for real estate must not exceed 25 per cent of total lending;

(iv) Bank's funding ratio must not exceed 1. (Funding ratio is defined as aggregate lending divided by working capital (all shares, junior and senior debt, but excluding debt shorter than one year)).

(v) Liquidity coverage, defined as retail deposits in relation to wholesale funding must be at least 50 per cent."

Prima facie it looks like a fit case for India to follow. This, of course, needs a detailed examination and customisation in Indian context.

4. Liquidity support to ARCs by RBI on Mortgage based Securities

Stress in the financial system has been on the rise. For an effective quarantine, bad loans should be distanced from good loans in the interest of health of banking. These bad loans can be accumulated in Asset Reconstruction Companies (ARCs) which can act like isolation centres. RBI can extend a helping hand in providing a liquidity support window to ARCs based on Mortgage Based Security Receipts (Security Receipts with underlying mortgage securities) so that the ARCs can scale up their operations and play an effective role in sanitizing health of the financial sector.

(The author is a policy analyst and commentator. Views are personal and do not in any way represent organization/ industry body he is associated with.)

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