The outcome of MPC of RBI's meeting on Aug 06 was on expected lines. Rates have been left unchanged, as expected while the committee has maintained accommodative stance. It also noted that the previous reduction of 250 bps is achieving the expected outcome.
Additional special liquidity facility to NHB and NABARD to help the housing sector and agriculture/rural activities is welcome. Raising of LTV on gold loans to 90% from 75% may have some delayed impact as lenders may be wary of lending upto 90% after Gold prices have already run up too much over the past few months.
Key provision of restructuring of loans to borrowers who were not in default on March 01 through recommendation of KV Kamath committee cannot have come sooner. The committee's recommendations will enable ensuring prudent entry norms, clearly defined boundary conditions, specific binding 10 covenants, independent validation and strict post-implementation performance monitoring. Mention of outer limit of 2 years for the resolution and raising the provision limits to 20% for lenders not signing inter-creditor agreement will help speeden the resolution process and maintain the soundness of the banking system.
Priority sector status has been granted to startups and the limits for renewable energy, including solar power and compressed bio-gas plants, have being increased. Also target for lending to 'Small and Marginal Farmers' and 'Weaker Sections' are being increased.
Overall the outcome of MPC meet this time around is prudent, to the point and meets the current requirements of the lending community though the borrowers may want something more. What will be crucial to watch is the challenges faced by the committee in making its recommendations considering the viewpoints of the parties involved and ensuring the success of the plan.