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Covid-19: No regulatory relief; Nirmala Sitharaman instead asks banks to take a hit

Anand Adhikari     March 24, 2020

Contrary to expectations, finance minister Nirmala Sitharaman's relaxation to individuals and companies in areas of compliance and statutory regulations has completely left out the banking industry.

The relaxations such as removal of debit card ATM charges, waiver on maintaining minimum balance and reduction of bank charges for digital trade and transactions will eat away some of their fee-based sources of income.  

The banks were expecting some regulatory relaxations in the NPA classification norms. In the post-lockdown scenario, the existing default period of 90 days will push many companies into bad loan bracket with stringent requirement of provisioning for banks that will nibble into their profits and capital.

Aditya Puri, MD&CEO of the largest private sector bank HDFC Bank has already gone on record suggesting that the central bank needs to to take immediate measures such as easing of asset quality norms. The banking industry with over 9 per cent gross NPAs is coming out from a difficult phase of provisioning and lower profits after a period of seven years. The Covid-19 disruptions would further push them down.

It is not known whether the Reserve Bank of India will be separately announcing relaxation in compliance and statutory regulations for banks.  

Similarly, banks need some relaxation in minimum capital requirement and maintaining the cash reserve ratio (CRR) and statutory liquidity ratio (SLR). Any reduction in these statutory ratios will help improve their liquidity or funds to lend more during these difficult times.  

Globally, some central banks have extended relief in maintaining additional capital buffers while many banks In other countries are asking for relaxation in certain elements of bank capital. Take, for instance, the RBI had earlier deferred the implementation of the last tranche of the capital conservation buffer to March 31, 2020. This requirement can be extended further by a year till March 2021.

In addition, some relief can be provided in risk weight requirement for various retail as well as loan assets. There is a good case of reducing risk weights in certain loan segments.

The only noteworthy announcement by the FM was about hiking the minimum default limit from Rs 1 lakh to Rs 1 crore for triggering the Insolvency & bankruptcy code (IBC). In these difficult tines, Rs 1 lakh default by a corporate to its suppliers or even workmen is easily possible because of the complete lockdown and supply chain disruptions. The banks will be saved from any operational creditor (s) taking the company to the IBC, which in turn triggers the entire process.

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