India Pushes ‘Last-Mile’ Funds for Cash-Starved Shadow Banks
India’s RBI Suspends Bank Dividends to Preserve Capital
(Bloomberg) -- India’s central bank announced new measures to encourage lending to the country’s cash-starved borrowers by injecting $6.5 billion into the banking system, ordering lenders to freeze dividends and easing rules on bad loans.
In another effort to strengthen the financial system’s response to the coronavirus-fueled slowdown, Reserve Bank of India Governor Shaktikanta Das said the central bank will provide 500 billion rupees ($6.5 billion) in a new round of Targeted Long-Term Repo Operations. The banks should use the money to provide financing for institutions including shadow lenders and micro-finance firms, he said.
The RBI also exempted banks from paying dividends for the fiscal year ended March 31, extended the timeline for bad loan provisions by banks and shadow lenders, and provided a 500 billion-rupee pipeline to government refinancing agencies which in turn will lend to micro borrowers.
“The steps have been taken to ensure last-mile funding to the companies who genuinely need this money,” said Siddharth Purohit, an analyst at SMC Global Securities Ltd. in Mumbai.
The regulator joins counterparts around the world that have advised lenders to cut or delay dividends to ensure they have enough buffers to weather what the International Monetary Fund predicts to be the worst global recession since the 1930s. In India, bad loans are expected to swell as businesses shut down and cut jobs amid the world’s biggest economic lockdown.
India’s shadow banks account for about 15% of total loans but have been shrinking their books since the default of a major infrastructure lender in 2018. The lockdown is expected to exacerbate their difficulties, causing problems for auto-parts makers, tailors and other small borrowers which typically rely on shadow lenders.
The RBI relaxed the timeline for banks and shadow lenders governing the classification of bad loans of companies that have defaulted. But the RBI also asked banks to set aside an extra 10% on the loans that are subject to the relaxation.
That could require the banks to set aside 300 billion-400 billion rupees of additional provisions in order to qualify for the easier terms, according to ICRA Ltd., the local arm of Moody’s Investors Service.
As a regulator, the central bank “has to ensure that our banks remain financially healthy over a period of time and a long time,” Das said.
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