Mumbai: The Reserve Bank of India's (RBI) move last week to use unconventional tools to nudge banks to lend more to automotive, housing purchases, and MSME sector are unlikely to support sustainable credit growth until capitalisation improves meaningfully across banks, in particular among state-owned banks, rating agency Fitch said on Monday. The agency also warned that Indian banks have a poor track record with restructuring and that the extensions announced for real estate and MSME sectors are likely to defer asset-quality pressures unless there is a sustained improvement in macroeconomic conditions.
The RBI, in its sixth bi-monthly monetary policy last week, announced allowed exemption from maintenance of cash reserve ratio (CRR) on incremental disbursement on auto, housing and MSME loans. The CRR is the percent of its cash deposits a commercial bank must maintain with the RBI. Banks can now knock off the equivalent of additional loans disbursed to these priority fields between end-January and end-July 2020 from their net demand and time liabilities for the purpose of calculating their cash reserve ratio. The central bank also permitted extension of date of commencement of commercial operations of commercial real estate project loans, delayed for reasons beyond the control of promoters, by another one year without downgrading asset classification, and last but not the least announced an extension of one-time restructuring benefit for MSMEs without an asset classification downgrade.
“The move is intended to improve monetary transmission, supporting credit to fields that have multiplier effects...However, most of these sectors have had above-average lending growth in the last few years, either directly or indirectly via non-banks, and could be at risk were the economy to slow. Moreover, these measures are unlikely to support sustainable credit growth until capitalisation improves meaningfully across banks, in particular among state-owned banks.” Fitch Ratings said.