The announcements will unclog the liquidity deficiency in the system where cash flows have dried up due to the slowdown. They, however, will not lead to generation of any new credit demand.
That apart, the decision to relax non-performing asset (NPA) classification norms, and to extend refinance facility worth Rs 50,000 crore to NABARD, SIDBI and NHB is a relief for the entire financial sector. It is the RBI’s way to ensure that the NPA menace doesn’t haunt the sector again.
Coming to the decision, the RBI has announced decision to launch second round of targeted long-term repo operations (TLTRO). The TLTRO 2.0 worth Rs 50,000 crore, along with its advisory to banks to invest 50 per cent of funds under TLTRO 2.0 to small and mid-sized NBFCs
will act like a lifeline to the NBFCs.
The RBI has tried to make sure that they are able to honour their re-payments, and fulfill their working capital requirements once the situation begins to normalise. What concerns me, however, is the fact that the move might help only the big players, whereas the small players may still be left high and dry. The low rated NBFCs
may not be able to take reap the benefit.
From an investment view point, the outlook for the banking space continues to remain slightly negative. While the recent measures give a lot of relaxations in terms of reduced LCR and relaxed NPA norms, leading to (intended) hike in lending activity and some accounts getting the benefit of not being tagged as NPAs, the move will help corporate in the short-term. From a medium to long term view, banks will have multiple sectors to deal with and stocks in the banking and NBFC space may not see major buying interest.
The problems, therefore, may resurface once the moratorium period is over. Hence, in my view, while banks have corrected a lot from their peak prices, the absolute valuations of the stocks are still expensive. Therefore, I don’t see investors jumping into and taking big positions in the sector.
Siddharth Purohit is equity research analyst at SMC Global Securities.
(As told to Nikita Vashisht)