Do Not Want A Repeat Of High NPAs Of The Past, Says RBI’s Das
Shaktikanta Das, governor of the Reserve Bank of India (RBI) in Mumbai, India, on March 3, 2020. (Photographer: Kanishka Sonthali/Bloomberg)

Do Not Want A Repeat Of High NPAs Of The Past, Says RBI’s Das

The Reserve Bank of India’s recent framework for stressed asset resolution is intended to provide relief to viable businesses hit by the Covid crisis, while avoiding a repeat of high levels of non-performing assets seen after previous restructuring exercises. That’s according to RBI Governor Shaktikanta Das, who spoke at a conference organised by the Federation of Indian Chambers of Commerce and Industry on Wednesday.

The purpose of constituting a committee under veteran banker KV Kamath to recommend sector-wise thresholds for restructuring was to ensure a revival of businesses that were affected by the Covid-19 pandemic substantially and are now facing cash-flow problems.

The focus of the framework is to assist businesses which are otherwise viable but are facing problems. The emphasis is to enable these companies to come back to normalcy and resume activity.
Shaktikanta Das, Governor, RBI

Das said while designing the framework, the RBI had kept in mind depositor interests and the stability of the financial sector. “We do not want a repeat of the situation 4-5 years back when the NPA levels of banks went up steeply,” he added.

Also read: Is The Kamath-Proposed Restructuring Framework Effective?

Liquidity Measures Helped Reduce Borrowing Costs

Commenting on financial markets, Das said conditions have eased significantly in response to the front loaded interest rate cuts and liquidity measures. "Despite substantial increase in government borrowing programme, large surplus liquidity conditions has facilitated non disruptive mobilisation of resources at the lowest borrowing costs in a decade.”

The central bank has provided both short term and long term liquidity to banks since the start of the Covid-19 crisis. Further, with the central bank announcing special open market operations last month, bond yields have softened further, Das said.

“Benign financial conditions and narrowing of spreads have spurred a record issuance of corporate bonds close to Rs 3.2 lakh crore up to August. Though bank credit growth remains muted, commercial bank investment in bonds, commercial papers, debentures and shares of corporates between April to August increased by Rs 5,615 crore as against a decline of Rs 32,000 crore in the same period last year,” he said.

Credit spreads for bond market issuers have come down in the last three to four months across all rating categories, although the spread at which a AAA-rated company raises funds from the market has fallen far more than the cost for a BBB-rated company, Das added.

Also read: The RBI’s Quadrilemma

Recovery Not Fully Entrenched

Das said that while there are some indications of stabilisation of economic activity in the second quarter, the recovery is “not yet fully entrenched.”

The recovery is, however, not yet fully entrenched and moreover, in some sectors, upticks in June and July appear to be levelling off. By all indications, the recovery is likely to be gradual as efforts towards reopening of the economy are confronted with rising infections.
Shaktikanta Das, Governor, RBI

In an earlier speech in July this year, the RBI governor had highlighted that dynamic shifts were taking place in five sectors including the agriculture and farm sector, energy sector, information technology and startups, supply and value chains and infrastructure sector.

On Wednesday, Das further highlighted that investments in human capital, particularly education and health, exports, tourism, food processing and productivity would help spark an economic revival and sustain growth in the medium term. “In order to reap the demographic dividend we have to raise expenditure on education and the public investment target in education of 6% of GDP must be pursued,” he said.

He added that domestic lenders should pro-actively look to opportunities arising in the education sector given the New Education Policy unveiled by the government.

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