RBI Provides NPA relief to banks, curbs dividends, cuts Reverse Repo by 25 basis points and Rs 50,000 crore TLTRO 2.0 for NBFCs

Reserve Bank of India (RBI) Governor Shaktikanta Das today announced a second tranche of liquidity boost for the economy. The announcements covered four key points:

1. A 25 basis point reverse repo cut taking it to 3.75 per cent from 4 per cent earlier. The move has been taken to allow banks to lend more.
2. A TLTRO 2.0 of Rs 50,000 crore specifically targeted at NBFCs has been announced.
3. It also announced relaxation of asset classification norms. In respect of all accounts for which banks and financial institutions grant a moratorium, the 90-day NPA norm will exclude moratorium period.
4. Scheduled commercial banks and co-op banks will not make any further dividend payout for profits from FY20 until further instructions.

Details of important points of press release are as under:

Targeted Long Term Operations (TLTRO) 2.0: Accordingly, it has been decided to conduct targeted Long-Term Repo Operations (TLTRO 2.0) for an aggregate amount of ₹50,000 crore, to begin with, in tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 should be invested in investment grade bonds, commercial paper, and non-convertible debentures of NBFCs, with at least 50 per cent of the total amount availed going to small and mid-sized NBFCs and MFIs.

Refinancing Facilities for All India Financial Institutions (AIFIs): All India financial institutions (AIFIs) such as the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB) play an important role in meeting the long-term funding requirements of agriculture and the rural sector, small industries, housing finance companies, NBFCs and MFIs. These All India Financial Institutions raise resources from the market through specified instruments allowed by the Reserve Bank, in addition to relying on their internal sources.

Liquidity Adjustment Facility: Fixed Rate Reverse Repo Rate: As I have mentioned earlier, the surplus liquidity in the banking system has risen significantly in the wake of government spending and the various liquidity enhancing measures undertaken by the RBI. On April 15, the amount absorbed under reverse repo operations was ₹6.9 lakh crore. In order to encourage banks to deploy these surplus funds in investments and loans in productive sectors of the economy, it has been decided to reduce the fixed rate reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 4.0 per cent to 3.75 per cent with immediate effect. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the Bank Rate remain unchanged at 4.65 per cent.

Asset Classification: Economic activity has come to a standstill during the period of the lockdown, with consequential lingering effects which have unambiguously affected the cash flows of households and businesses. On March 27, 2020 the RBI had permitted lending institutions (LIs) to grant a moratorium of three months on payment of current dues falling between March 1 and May 31, 2020. It is recognized that the onset of COVID-19 has also exacerbated the challenges for such borrowers even to honour their commitments fallen due on or before February 29, 2020 in Standard Accounts. The Basel Committee on Banking Supervision (BCBS) has taken cognizance of the financial and economic impact of COVID-19 and very recently announced that “………. the payment moratorium periods (Public or granted by banks on a voluntary basis) relating to the COVID-19 outbreak can be excluded by banks from the number of days past due” in respect of NPA recognition.

Therefore, it has been decided that in respect of all accounts for which lending institutions decide to grant moratorium or deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020. NBFCs, which are required to comply with Indian Accounting Standards (IndAS), may be guided by the guidelines duly approved by their boards and as per advisories of the Institute of Chartered Accountants of India (ICAI) in recognition of impairments. In other words, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers.

At the same time, we are cognizant of the risk build-up in banks’ balance sheets on account of firm-level stress and delays in recoveries. With the objective of ensuring that banks maintain sufficient buffers and remain adequately provisioned to meet future challenges, they will have to maintain higher provision of 10 per cent on all such accounts under the standstill, spread over two quarters, i.e., March, 2020 and June, 2020. These provisions can be adjusted later on against the provisioning requirements for actual slippages in such accounts.

Asset Classification under the Prudential norms on Income Recognition, Asset Classification (IRAC):

1. In terms of the circular DOR.No.BP.BC.47/21.04.048/2019-20 dated March 27, 2020 (‘Regulatory Package’), the lending institutions were permitted to grant a moratorium of three months on payment of all term loan instalments falling due between March 1, 2020 and May 31, 2020 (‘moratorium period’). As such, in line with the clarification provided by the Basel Committee on Banking Supervision, in respect of all accounts classified as standard as on February 29, 2020, even if overdue, the moratorium period, wherever granted, shall be excluded by the lending institutions from the number of days past-due for the purpose of asset classification under the IRAC norms.
2. Similarly in respect of working capital facilities sanctioned in the form of cash credit/overdraft (“CC/OD”), the Regulatory Package permitted the recovery of interest applied during the period from March 1, 2020 upto May 31, 2020 to be deferred (‘deferment period’). Such deferment period, wherever granted in respect of all facilities classified as standard, including SMA, as on February 29, 2020, shall be excluded for the determination of out of order status.
3. NBFCs which are required to comply with Indian Accounting Standards (IndAS) shall, as hitherto, continue to be guided by the guidelines duly approved by their Boards and as per ICAI Advisories for recognition of the impairments.

Provisioning: In respect of accounts in default but standard where provisions of paragraphs (2) and (3) above are applicable, and asset classification benefit is extended, lending institutions shall make general provisions of not less than 10 per cent of the total outstanding of such accounts, to be phased over two quarters as under:

(i) Quarter ended March 31, 2020 – not less than 5 per cent

(ii) Quarter ending June 30, 2020 – not less than 5 per cent

6. The above provisions may be adjusted against the actual provisioning requirements for slippages from the accounts reckoned for such provisions. The residual provisions at the end of the financial year can be written back or adjusted against the provisions required for all other accounts.

Extension of Resolution Timeline: Under RBI’s prudential framework of resolution of stressed assets dated June 7, 2019, in the case of large accounts under default, Scheduled Commercial Banks, AIFIs, NBFC-ND-SIs and NBFC-D are currently required to hold an additional provision of 20 per cent if a resolution plan has not been implemented within 210 days from the date of such default. Recognizing the challenges to resolution of stressed assets in the current volatile environment, it has been decided that the period for resolution plan shall be extended by 90 days. Details will be spelt out in the circular.

Distribution of Dividend: It is imperative that banks conserve capital to retain their capacity to support the economy and absorb losses in an environment of heightened uncertainty. It has, therefore, been decided that in view of the COVID-19-related economic shock, scheduled commercial banks and cooperative banks shall not make any further dividend payouts from profits pertaining to the financial year ended March 31, 2020 until further instructions. This restriction shall be reviewed on the basis of the financial position of banks for the quarter ending September 30, 2020.

Liquidity Coverage Ratio: The Reserve Bank has been proactively taking measures to address the systemic liquidity issues through a slew of monetary and market operations. In order to ease the liquidity position at the level of individual institutions, the LCR requirement for Scheduled Commercial Banks is being brought down from 100 per cent to 80 per cent with immediate effect. The requirement shall be gradually restored back in two phases – 90 per cent by October 1, 2020 and 100 per cent by April 1, 2021.

NBFC Loans to Commercial Real Estate Projects: In terms of the extant guidelines for banks, the date for commencement for commercial operations (DCCO) in respect of loans to commercial real estate projects delayed for reasons beyond the control of promoters can be extended by an additional one year, over and above the one-year extension permitted in normal course, without treating the same as restructuring. It has now been decided to extend a similar treatment to loans given by NBFCs to commercial real estate. This will provide relief to NBFCs as well as the real estate sector.