Slowdown is perhaps cyclical, not structural; there is room for structural reforms to be undertaken, says the RBI Governor
During the post policy media interaction, RBI Governor Shaktikanta Das explained why the bank announced an unconventional rate cut of 35 basis points (bps).
Why a 35 bps rate cut?
According to the assessment of the MPC (monetary policy committee), based on demand conditions etc, a 25 basis-point [rate] cut was inadequate, while a 50 basis-point cut was excessive. That is why we took a balanced call.
What are the underlying issues, according to the RBI, that are hurting growth?
There is a demand and investment slowdown; both put together having a dampening effect on growth. We have reduced the growth projection to 6.9% with risks slightly to the downside. Our understanding is that, at this point, it is perhaps a cyclical slowdown, not really a deep structural slowdown. Nonetheless, we have to recognise that there is room for structural reforms which needs to be undertaken.
What is the RBI’s view on dollar bonds?
We have conveyed our views internally to the government. [The] Government is consulting the Reserve Bank on this issue. For the moment, I would leave it at that.
Where do you see the recovery in growth coming from?
Our expectation is — and I am saying this after our interaction with the government — the government will take necessary, further measures as may be required to deal with various issues. With the RBI cutting interest rates, the credit flow will revive. Therefore, growth numbers will pick up.
What steps will the Reserve Bank take to ensure faster transmission of monetary policy rates?
The system is flush — if I can use the word — with liquidity. So, therefore, the rate cuts done by the RBI and the liquidity which we have injected, both have started the cycle of rate cuts so far as new loans from banks are concerned.
We have a sense that there will be improvement.
The RBI is monitoring it regularly. And in future, whatever steps are required for faster transmission of rates, the Reserve Bank of India will not hesitate to take those steps.
Despite interest rate cuts, there has been a demand slump. What stopped you from a 50 bps rate cut?
In policy making there is something called ‘you take a call.’ When you take a call, there is something more than mere numbers, which is beyond what is there just in the data. So, the MPC, in its considered opinion, took the view that it will be 35 bps rate cut.
What is so sacred about multiples of 25 bps? It has just been adopted and has become a convention. So, therefore, when you do something out of convention, too much should not be read into it. So, it is a judgement call that the MPC has taken.
The rupee is under pressure. Will it impact RBI’s effort to push if it depreciates further?
On the rupee, it won’t be appropriate for me to give some kind of forward guidance.
I will just repeat the stated policy of the RBI that it is the RBI’s responsibility to manage volatility of the rupee.
Is a CRR (cash reserve ratio) cut on the table? How long do you see the rate easing cycle continuing?
At the moment, there is no proposal for a cut in the cash reserve ratio. As far as future rates are concerned, you have to wait for the incoming data and [watch] how the macroeconomic situation evolves.
RBI raises cap on exposure to single NBFC to 20%; lower risk weight for consumer loans may cut capital needs by ₹12,500 cr.
Shaktikanta Das flanked by RBI colleagues Michael Patra, N.S. Vishwanathan, B.P. Kanungo and Mahesh Jain. Paul Noronha
The on-going liquidity crunch faced by non-banking finance companies (NBFCs) has made the Reserve Bank of India (RBI) to take further measures to increase credit flow to the sector.
The central bank has decided to increase the cap on a bank’s exposure to a single NBFC to 20% of its tier-I capital from 15% now.
Further, RBI has decided to give ‘priority sector’ tag for banks lending to NBFCs, for on-lending to farm, small and medium enterprises and housing sector.
Banks have been allowed to lend to the NBFCs for on-lending to the agriculture sector up to ₹10 lakh, up to ₹20 lakh to micro and small enterprises, and for housing, up to ₹20 lakh per borrower. These will be classified as priority sector lending.
This will improve the available sources of funding, especially for new-age mid and small-sized NBFCs, at a relatively lower cost, while improving banks’ ability to meet their priority sector lending targets.
“Permitting banks to on-lend through NBFCs for priority sector lending would make this transmission faster and more efficient,” Umesh Revankar, MD and CEO, Shriram Transport Finance Ltd., said.
RBI Governor Shaktikanta Das also batted for mutual fund and insurance companies, who are creditors of stressed NBFCs, to be part of the resolution process, and said inter-regulatory discussions were going on in this regard.
“It is necessary to look at the whole liability of the entity comprehensively. So, we have had inter-regulator meetings, and IRDAI has taken a decision to enable the insurance companies to be a part of the inter-creditor agreement. Our discussions with other regulators are going on,” Mr. Das said.
In the resolution process of mortgage lender Dewan Housing Finance Corporation Ltd. (DHFL), where insurance and mutual funds have sizeable exposure, banks want other creditors to be a part of the resolution process.
Mutual funds are awaiting approval from the markets regulator for becoming a part of the bank-led resolution plan.
In a bid to encourage banks to extend loans to retail consumers segments such as individual vehicle loans and personal loans, amid a sharp slowdown in demand, the central bank has decided to lower the risk weight for consumer loans, excluding credit cards.
The risk weight, which was 125% as prescribed in 2004, will now become 100%. As a result, banks will need to set aside lower capital for these loans.
Ratings agency ICRA said with personal loans of ₹6 lakh crore outstanding as on June 2019, a 25-percentage point reduction in risk weight may also reduce the capital requirements of banks by ₹12,500 crore and add 14 bps to their capital ratios.
Industry meets FM over fast-tracking of car loans, job losses
Finance Minister Nirmala Sitharaman and representatives of the auto sector, on Wednesday, discussed the possibility of fast-tracking of loans to buy vehicles, and also the employment status of the auto sector in terms of job losses so far, said officials present at the meeting.
The sector also sought easing of tax rates to bolster demand. However, the Finance Minister said that the government would take a consolidated view and take steps only after it had a more complete view of the issues plaguing the major sectors, an official added.
“The auto sector representatives met the Finance Minister and laid out the issues that are affecting their sector,” the official told The Hindu. “The major issue they highlighted was that demand was poor, and that this was because customers were finding it difficult to secure loans.”
“The representatives and the Minister discussed the possibility of a fast-track loan programme for car loans and also for other consumer sectors,” the official added. “The employment issue was also highlighted, but the FM said the government will take a decision on all the issues only once all the sector meetings are completed and internal deliberations are done.”
“The meeting was a fruitful one in that every auto maker and component maker who attended was given ample time to speak,” a representative from the auto sector said on the condition of anonymity. “The meeting went on for three hours and all the sector’s issues were discussed.”
The auto industry is expected to submit a formal proposal with all their suggestions in a day or two.
Heavy Industries Minister Arvind Sawant and Minister of State for Finance Anurag Thakur, as well as senior officials of the Finance Ministry attended the meeting.
(With inputs from Yuthika Bhargava)
RBI promises steps for faster transmission to consumers
Hours after the Reserve Bank of India decided to cut interest rates for the fourth straight time, State Bank of India (SBI) responded with a 15-basis point (bps) cut in the marginal cost of fund-based lending rate (MCLR) — the benchmark lending rate.
SBI announced the reduction across all tenors with effect from August 10. With this reduction, its one-year MCLR will be 8.25%.
“With today’s MCLR cut, home loans have become cheaper by 35 bps since April 10, 2019,” SBI said. Since SBI has linked its home loan rate to the repo rate, those rates will also fall by 35 bps.
“With today’s cut in the policy rate, SBI’s effective Repo Linked Lending Rate (RLLR) for cash credit /over draft customers will stand revised to 7.65%,” SBI said.
Banks have been reluctant so far to reduce interest rate, which is evident from the fact that their MCLR declined 29 bps in response to the 75 bps repo rate cut by RBI between February and June. However, now more banks may follow suit.
“Evidently, this would go to reduce the lending rate offered by banks. With improvement in the liquidity position and reduction in deposit rates offered by banks, further reduction in lending rate are expected,” said Sunil Mehta, MD & CEO of Punjab National Bank and chairman of the Indian Banks’ Association. By the time the festive season sets in, the lower lending rate would help to boost domestic demand, he added.
RBI Governor Shaktikanta Das also said he expected more rate cuts by banks.
“We have a sense that there will be improvement [in monetary transmission]. RBI is monitoring it regularly. And in future, whatever steps are required for faster transmission of rates, RBI will not hesitate to take those steps,” Mr. Das said.
Company’s production capacity to grow by a third and touch 20 million tonnes in two years
The India Cements Ltd. (ICL) is working on expanding its production capacity from the existing 16 million tonnes to 20 million tonnes over the next two years, according to a top official.
ICL has already started the ground work for an integrated plant at Damu in Madhya Pradesh and a grinding unit in Uttar Pradesh.
The expansion programme is expected to involve an investment outlay of ₹1,300 crore to ₹1,400 crore.
Upgradation of existing plants would also form part of the expansion initiative.
“We have a mining lease in Madhya Pradesh. We are now in the process of buying the land,” said N. Srinivasan, vice-chairman and managing director, ICL.
To a question, he said ICL required about 500 acres for mining and another 200 acres for the integrated cement plant in Madhya Pradesh. The company had already acquired 160-170 hectares from private parties, he added. The project cost would be met through a combination of borrowings and internal accruals, he added.
“We will start the work on the three-million-tonne integrated plant once the land acquisition reaches a sizeable portion and then place order for equipment,” he said. According to ICL officials, it would take at least three-to-four months to begin the project. It would be ready in two years, taking the total capacity to almost 20 MTPA.
Net profit rises
ICL posted a 243% increase in its standalone net profit for the first quarter ended June 2019 to ₹72.43 crore on the back of improved selling prices, cost control measures and softening fuel costs.
Revenue from operations grew to ₹1,468.80 crore from ₹1,360.65 crore.
Earnings before interest, depreciation, taxes and amortisation (EBIDTA) improved to ₹245 crore from ₹162 crore.
During the quarter, ICL’s cement sales, including clinker, stood at 30.42 lakh tonnes against 30.75 lakh tonnes.
The net plant realisation increased by 11%.
“EBIDTA increased by more than 50%. We recorded higher EBIDTA after 11 quarters.
“Our capacity utilisation was 77%, and during this year, we expect it to reach 85%,” Mr. Srinivasan said.
Asserting that the cement industry had to remain content with a marginal growth of 1.2% during the first quarter against 13% registered in the corresponding quarter last year, he expected the demand to revive post monsoon and once governments finalised their action plans on the infrastructure front.