RBI's Latest Measures to Boost the Economy

To stem the tide of problems caused by the Coronavirus pandemic lockdown on the Indian economy, the RBI has announced additional measures. These measures include extension of realization period of export proceeds, increased Way and Means Advances limit, and countercyclical capital buffer.

Let us look at each of these steps in detail:

1. Extension of the realization period of export proceeds: Currently, the value of software and goods exports made is to be realized fully and sent to India within 9 months from the date of commencement of exports. To mitigate the problems caused by the Coronavirus to the economy, the RBI says that the realization period is increased to 15 months. Such a measure will help exporters get their receipts from affected countries easily, while offering more flexibility to clients abroad.

2. Review of the WMA limits in the States and UTs: It is decided to increase the limit of WMA by 30% from the current limit. This is to help the state governments to get relief from the economic problems caused by the pandemic. It is in effect from yesterday, 1st April 2020 and is valid till September 30, 2020.

3. Implementation of the CCyb (Countercyclical Capital Buffer): The CCyB was devised by the RBI in 2015, to be implemented or activated as and when the circumstances demand it. In this framework, the main indicator would be credit-to-GDP gap, along with other secondary indicators. As of now, the RBI has decided not to activate the CCyB.  

On 17 April, 2020, RBI Governor Shaktikanta Das  has once again come up with measures to curb the downfall of the economy.

He prefaced the address with IMF's projection that the global economy is expected to plunge into the worst recession since 'The Great Depression'; "Economic activity came to standstill during the lockdown," the RBI Governor added.

The measures include a cut of 25 basis points on the Reverse Repo Rate from 4% to 3.75%, with immediate effect (the Repo Rate stays the same). "Loans given by NBFCs to real estate companies to get similar benefit as given by scheduled commercial banks", "Banks not to make any further dividend payout in view of financial difficulties arising from Covid-19", he added.

An amount of Rs 50,000 crore has also been sanctioned to the following banks to enable them to meet sectoral credit needs:

• National Bank for Agriculture and Rural Development
• Small Industries Development Bank of India,
• and National Housing Bank

Meanwhile, the moratorium period offered by RBI has come under question as of late. Moody's opines that the loan moratorium could cause a greater build-up of credit loss for banks. India and China have both extended such measures to deal with the liquidity crunch amid the COVID-19 crisis. Although this can provide temporary relief to borrowers, it will constrain banks from taking proactive recovery actions and could lead to an even greater build-up of credit loss once the moratoriums are lifted, reports Moody's.

Moody's, in a report on the Asia-Pacific region on Tuesday, said that while policy stimulus will shore up credit quality for larger companies in sectors including airline and oil and gas, Asia's banking sector profitability would decline from falling asset quality and lower net interest margins.
 

RBI tells HDFC to reduce its stake in 2 entities to 50%

HDFC Bank has been asked by the Reserve Bank of India to reduce its stake in HDFC Ergo and HDFC Life Insurance from 51.43% to 50% to 50.58%, respectively.

Right now, the company holds 50.48% in the HDFC Ergo and 52.25% in HDFC Ergo Health. This is based on the share exchange ratio. HDFC Bank is entitled to a 50.48% in the merged entity. This is the stake, according to RBI that needs to be reduced before 6 months past from the date of merger.

As for HDFC Life Insurance Company, the company is required to lower its stakes to 50% within December 16, 2020, or down from the existing 51.43%.

A brokerage says that this sales can easily be worth around Rs. 1500 crore, or 14% of Financial Year 21s profits, and 1 or 2 percent of the net worth. The bank can use such gains to create a buffer of provisions. Regular dividends may suffer.

Even though the bank’s stake is going at or below 50% of ESOP conversion rate, it can drive up a slow dilution, the two companies of HDFC are still consolidated under the bank. The bank therefore can certainly exercise its control over the board. The company’s dividends and regulations may see no change.