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Banks and NBFCs - RBI comes to the rescue again - HDFC Securities

Posted On: 2020-08-08 00:33:33

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

The RBI's monetary policy committee unanimously voted to keep the policy rate unchanged at 4% and maintained its accommodative stance. It further stated that GDP growth is likely to be negative in FY21E but did not explicitly state to what extent. The MPC statement did not provide much clarity on inflation either but said that it is watchful.

The accompanying 'Statement on Development and Regulatory Policies' contained a slew of measures, the most significant of which was 'Resolution Framework for COVID-19 Related Stress'. This measure was anticipated and is preferred to the extension of the moratorium. The implementation of the framework will optically curtail FY21E GNPAs, and consequently limit provisioning requirements, as accounts under the framework will be effectively restructured and classified as standard (subject to conditions).

Given the uncertainty around the spread, the economic fallout of COVID-19, and lack of sufficient clarity on the framework, we have not revised our GNPA and provisioning estimates. Our core thesis remains unchanged, as we continue to prefer large private banks with more than adequate capital, strong liability franchises, and a reasonable asset quality track record.

MPC statement: The RBI's MPC unanimously voted to keep the policy rate unchanged at 4%. Consequently, the reverse repo and MSF rate were unchanged at 3.25% and 4.25% respectively. The RBI maintained its accommodative stance. The MPC remarked that global economic activity had remained fragile since its last meeting. At the same time, domestic economic activity recovered in June, from the lows of April-May, with several high-frequency indicators levelling off. The RBI expects headline inflation to remain elevated in 2QFY21, and moderate in 2HFY21, due to "large and favourable base effects". The RBI's industrial survey outlook indicated that domestic demand could recover from 2QFY21. The RBI expected GDP to de-grow in FY21, along the lines stated in its May resolution.

Statement of development and regulatory policies: In addition to the 'Resolution framework for COVID-19 related stress', the statement included the following: (1) additional liquidity of Rs 50bn each to the NHB and the NABARD for supporting HFCs and NBFCs (particularly NBFC-MFIs) respectively, (2) extension of the earlier MSME restructuring scheme to March 2021, wherein accounts that were standard as of 1st March 2020 would be eligible, (3) increase in the permissible LTV for gold loans for non-agricultural purposes from 75% to 90%, and (4) review of PSL guidelines.

Resolution framework for COVID-19 related stress: The framework is offered by way of a special window under the RBI's 7th June 2019 circular. However, it does not entail an asset quality downgrade. Broadly, it applies to personal and corporate loans (i.e. agricultural and MSME loans are not covered). To be eligible, an account must not have crossed 30dpd as of 1st March, in addition to compliance with other requirements. All categories of lenders are covered. 'Resolution' can include an extension of the tenor of loans up to two years, and in case of other* loans, it can include the grant of additional credit. Further, lenders must provide the higher of ~10% of the renegotiated amount, and the minimum required under the IRAC norms. Additional details on the scheme are awaited.

Source: Equity Bulls

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