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RBI actions will act as lifelines for NBFCs; await steps on bond buying

The announcements will unclog the liquidity deficiency in the system where cash flows have dried up due to the slowdown, says Siddharth Purohit
The Reserve Bank of India governor Shaktikanta Das’ decision to cut the reverse repo rate by 25 basis points (0.25 per cent) to 3.75 per cent from 4 per cent, while maintaining the repo rate at 4.4 per cent, is a welcome step. In his bid to fight the coronavirus (Covid-19) induced slowdown, the governor has made it clear that he doesn’t want banks to park money with the RBI.

His other decision, allowing banks to cut the liquidity coverage ratio (LCR) requirement to 80 per cent from 100 per cent, also underscores the same intent.

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.

For me, the RBI fell short of announcing measure related to bond buying. Industry was expecting the RBI to announce any programme aimed at buying bonds at lower rate, which didn’t come. I hope the central bank will soon take measures in the same direction. 

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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. 

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Siddharth Purohit is equity research analyst at SMC Global Securities.

(As told to Nikita Vashisht)


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