RBI favours targeted credit push to fuel economic growth

The Reserve Bank of India ( RBI) on Wednesday took note of growth concerns in the economy but said rate cut may not be an option in the absence of efficient transmission of policy rates by a banking system burdened with huge bad loans.

Instead, the central bank said, it favours a targeted intervention to improve lending to the healthier sectors of the economy that have recently slowed down.

“Interest rate policy works well when it is transmitted seamlessly by the financial institutions and markets to the real economy. In the absence of efficient transmission, changes in interest rate policy go waste and potentially have unintended consequences. The investment slowdown that has taken hold in the economy at least since Q1 of 2016-17 is deeply rooted in the structural debt overhang problem of a number of our industrial sectors. There are excessive debt saddled on our bank balance sheets. The accommodative policy of 2015-16 failed to revive investments, as it did not get transmitted fully by the stressed banks to the indebted sectors. RBI in partnership with the government has embarked on resolving this stress in a decisive manner. In the meantime, what is likely to work better that interest rate policy in responding to growth challenges is a targeted intervention to create greater lending capacity for the healthier sectors of the economy that have recently slowed down,” said Viral Acharya, Deputy Governor, RBI.

Deputy Governor N S Vishwanathan said delinquency is generally usually among the lowest in the home loan segment. In the past home loan portfolios of banks have responded well to targetted counter-cyclical measures.

“In view of this and also taking into account the forward and backward linkages of the home loan segment, RBI has decided to reduce risk weight of certain category of home loans and also the standard asset provisioning. The changes would reflect prospectively. The SLR has been reduced by 50 basis points as a part of the transition to 100% LCR by 2019, but in the interim it will provide some liquidity to banks. The two measures are expected to bring in some buoyancy to the home loan segment,” he said.

Vishwanathan said RBI was reworking the debt restructuring mechanism to address the bad loan problem of the banking system, especially for the resolution of the large assets.

In its policy statement, the central bank said with the CSO’s provisional estimates for 2016-17, the projection of real GVA growth for 2017-18 has accordingly been revised 10 bps downwards from the April 2017 projection to 7.3 per cent, with the risks evenly balanced. “The continuing remonetisation should enable a pickup in discretionary consumer spending, especially in cash-intensive segments of the economy,” it said.

“The reductions in the banks’ lending rates post demonetisation should support both consumption and investment demand of households and stress-free corporates. Moreover, government spending continues to be robust, cushioning the impact of a slowdown in other constituents. The implementation of proposals in the Union Budget should crowd in private investment as the business environment improves with structural reforms, including the GST, the Insolvency and Bankruptcy Code, and the abolition of the Foreign Investment Promotion Board,” RBI said.

The central bank said strengthening external demand would likely play a more decisive role in supporting the domestic economy. In addition, the new IIP broadens the recognition of industrial activity. On the downside, global political risks remain elevated and could materialise. Second, rising input costs and wage pressures may prove a drag on the profitability of firms, pulling down overall GVA growth. Third, the twin balance sheet problem – overleveraged corporate sector and stressed banking sector – may delay the revival in private investment demand.

RBI will continue to work in partnership with the government to address the stress in banks’ balance sheets. Better alignment of administered interest rates on small savings with market rates and stepped-up recapitalisation of banks to facilitate adequate flow of credit to productive sectors are important steps to follow through, the central bank said in the official statement.