Top news of the week
A boost for bank credit growth and financial inclusion
To meet the long-term objective of financial inclusion and bank credit growth, RBI has come up with certain new rules:
- Increasing the recurring payment e-mandate limit on cards to Rs.15,000
- Allowing UPI payments via Rupay credit cards
- Individual housing loan cap for cooperative lenders doubled
- Increasing the recurring payment e-mandate limit to Rs.15,000: To further facilitate recurring payment of the large value subscriptions like insurance premiums and education fees the Reserve bank of India has decided to increase the limit for e-mandates on cards from Rs.5,000 to Rs.15,000 per recurring payment. This means that customers will no longer need to provide a one-time password (OTP) on such payments up to Rs 15,000 per transaction.
Experts believe that by extending the recurring payment limit to Rs 15000, the process of subscription payments will become hassle-free for customers. Further, it will encourage more and more players to adopt the subscription framework, making the payment ecosystem more automated. This move will in turn lead to a larger digital transaction footprint and therefore becomes beneficial for the economy.
- RBI allows UPI payments via Rupay credit cards: To further deepen the reach and usage of UPI, RBI has now allowed the linking of Rupay credit cards with UPI. This has plugged a major gap within UPI which until now only allowed debit cards to be linked for payments. The basic objective of linking credit cards to UPI is to provide a customer with a wider choice of payments. Currently, UPI is linked through debit cards to savings accounts or current accounts,” says the Reserve Bank Deputy Governor T Rabi Sankar. RBI governor said that this arrangement will provide more avenues and convenience to the customers in making payments through the UPI platform. While transactions will be restricted to RuPay credit cards only for now, other major credit card providers like Visa and Mastercard are expected to be gradually chipped in as well.
- Individual housing loan cap for cooperative lenders doubled: Taking into account increasing house prices and to boost the home loan segment, the Reserve Bank of India doubled the limit on housing loans from cooperative banks and also permitted rural cooperative banks (RCB) to finance residential real estate projects to support affordable housing and inclusive growth.
For Tier-I UCBs the limit has now been revised to Rs.60 lakh from the previous Rs 30 lakh. Similarly, for Tier-II UCBs the limit has been increased from Rs.70 lakh to Rs.1.4 crore. For rural co-operative banks, the limit has been increased from Rs.20 lakh to Rs.50 lakh for RCBs with an assessed net worth less than Rs.100 crore and from Rs.30 lakh to Rs.75 lakh for other RCBs.
To support the residential housing growth in rural areas the RBI has opened a window for commercial real estate developers to access finance from State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs). With commercial developers getting access to new avenues the housing options in the residential segment will get a boost in rural areas.
RBI hikes repo rate to 4.90%, raises inflation forecast
As expected, RBI has increased the repo rate by 50 basis points to 4.9% and revised the retail inflation projection for the current fiscal to 6.7 % from 5.7%. For the current fiscal, Q1 retail inflation is projected to be at 7.5%, followed by 7.4% in Q2. Almost 75% of the increase in inflation is fueled by the recent spike in food prices.
Here are some interesting responses from industry leaders:
Financial services
“The RBI has navigated a delicate situation of rising inflation, slowing growth and reducing liquidity among global uncertainties caused by the Ukraine situation. 50 bps Repo rate hike and withdrawal of accommodation is continuity of policy and as per market expectations. The RBI will require all its skills and a little bit of luck to control inflationary expectations and support growth in the days to come,” said Nilesh Shah, Group President & MD, Kotak Mahindra Asset Management Company.
“Interestingly, while the RBI increases its FY23 inflation forecast to 6.7%, GDP growth projection is kept unchanged at 7.2%. We wonder that if higher interest rates don’t hurt growth, how will it help bring down inflation? It also suggests that most of the excess inflation is due to global/supply-side factors. Since the RBI continues to forecast strong growth, it is very likely that it delivers another 25bps hike on 4th of August before it takes a pause. Our fear is that growth could see a serious deceleration in H2FY23 and FY24 on the back of such steep tightening and structural constraints,” said Nikhil Gupta, Chief Economist, Motilal Oswal.
“Post the off-cycle announcement of a rate hike in May’22, paving the way for a series of rate hikes in the following meetings, the RBI increased the repo rate by 50bps. The MPC has decided to focus on calibrated withdrawal of accommodation while supporting growth. We believe the market had already discounted a rate hike of 40-50bps, and the key monitorable was a commentary on inflation. We may witness another rate hike, probably of a similar quantum, in the next monetary policy to manage inflationary pressures,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities.
“The June policy was a continuation of the off-cycle policy with the focus remaining squarely on inflation. The RBI’s decision of hiking repo rate by 50 bps as well as increasing inflation estimate by 100 bps were in line with market expectations. The tone of the policy continues to be hawkish and we expect the RBI to continue hiking repo rate to ensure a neutral to marginally positive real policy rate. We also expect another 50 bps hike in CRR to 5% by end-FY2023 to move the liquidity conditions towards the pre-pandemic levels,” said Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities.
“The RBI hike in repo rate was impending due to the inflation spike and global macroeconomic scenarios. The overall increase of ~ 1% in the cost of funds by the RBI over the last few months will impact the overall feasibility of large projects, infrastructure and long gestation projects. MSMEs, on the other hand, are recovering due to improved customer sentiment after nearly 2 years of uncertainty. MSMEs need more adequacy and certainty of funds versus costs alone and thus we believe they should be able to handle this increase, as long as this stays in this range for the medium term,” said Manish Lunia, Co-Founder of Flexiloans.com.
“With CPI forecasts at 6.7% from 5.7%, RBIs rate hike of 50bps came in line with market expectations and was taken into account by the market in the previous trading sessions. In an attempt to curb inflation, the expectations of this rate hike had been factored in the form of increase in bond yields, which might result in expensive borrowing for corporates. However, a consequent correction expected in raw material prices as a result of this announcement might provide a stable long term growth plan for the overall economy,” said Shivam Bajaj, Founder & CEO at Avener Capital.
Real estate
“For a few months, the inflation rate has been above 6%, which is beyond the RBI’s safe zone. If not controlled, the inflationary pressure could destabilize an otherwise bullish Indian economy. Although the recent step will increase the home loan rates, an unstable economy is not conducive to the overall health of the real estate industry. For the industry to operate optimally, it is important that the economy continues to grow in a stable, inclusive, and steady fashion,” said Atul Goel, MD, Goel Ganga Group.
RBI’s new standard asset norm for Large NBFCs
With the increasing contribution of NBFCs towards the growth of the Indian financial system, RBI has decided to tighten its grip on lending activities of large Non-Banking Financial Companies. Now the large or upper layer NBFCs will have to set aside 0.25 -2% of the loan amount for standard assets as provisions based on category of assets like SME, real estate, and housing loan. The new norms on standard asset provisioning will come into effect from October 1st 2022.
In case of individual housing loans and loans to Small and Micro Enterprises (SMEs), the rate of provision has been specified at 0.25%. For housing loans offered at the teaser rate, NBFCs will need to make a provision of 2% on standard assets initially, and 0.4% a year after the rate is reset.
The rate of provisioning for commercial real estate loans other than residential ones, provisions has been set at 1% of the outstanding amount. The rate of provision for commercial real estate loans for residential housing stands at 0.75% of the outstanding amount. For all other loans, the rate of provision is 0.4% of the outstanding amount.
Other Highlights of the Week
EPFO is considering extending the investment limit in Equity to 25%
The Employees’ Provident Fund Organisation (EPFO) is weighing a proposal to raise its investment limit in equities to as much as 25% of incremental flows from the existing 15%. The equity investment will be first raised to 20% and then to 25% in the second phase. EPFO’s idea to gain higher exposure in stocks seems to be aimed at helping bridge the shortfall in returns with investment in debt securities
RBI will soon come out with regulatory architecture for digital lending platform
To address the challenges that customers are confronted with regard to lending through digital platforms, many of which are unauthorised, unregistered, the Reserve Bank of India will soon come out with regulatory architecture for the digital platforms.
