The second debt restructuring of state electricity boards (SEBs) will have lower provisioning, which will be beneficial for banks, Reserve Bank of India (RBI) said on Wednesday.
However, the central bank has clarified that since the first debt recast was carried out in only a few states and the government has come out with a comprehensive alternative debt recast plan, RBI does not treat the alternative plan as a second debt recast.
The present plan will continue to get the benefit that was given initially.
Restructured standard advances attract a provision of 2.75 per cent, compared to 0.40 per cent, which is levied on standard advances.
In addition, banks have to provide for the diminution in the net present value of the loan following restructuring.
However, banks can avoid such additional provisioning, only after regulatory approval.
While there are instances that regulatory leeway regarding provisioning was given during first debt recast, RBI had always maintained that such requests will not be entertained if the same asset is restructured for the second time.
“The central government has come out with a very comprehensive restructuring plan and in that they had one aspect to do with RBI in particular. That was about whether to treat it as a second restructuring or not,” said Anand Sinha, deputy governor, RBI, on Wednesday while speaking to analysts in a conference call. Last year, the government had approved restructuring of Rs 1.9 lakh crore debt of SEBs.
Sinha said RBI has agreed to that because the first restructuring was completed in just three states . “Not even one year is over and one cannot say that restructuring has failed. What has happened is that a much more comprehensive restructuring plan has been put in place, which is much better for the bank. That is why we have not considered it as a second restructuring and given the benefit of asset classification,” he said.
In the conference call, RBI also said that the interest rate cuts will also depend on the current account deficit (CAD). “We will take into account the CAD. It will not just be driven by inflation number and inflation trajectory,” said RBI governor D Subbarao.
He added that there is big risk of the CAD, which will have implications for larger macroeconomic management and also for inflation and monetary policy decisions. “We are not targeting a CAD level by way of monetary policy. What we try to convey is that the CAD has implications for inflation and therefore for the conduct of monetary policy,” said Subbarao.
The CAD widened to a record high of 5.4 percent of gross domestic product (GDP) in the September quarter as export growth slowed more sharply than imports, with a similar gap expected in the December quarter.
According to the newly-appointed deputy governor of RBI Urjit Patel, both monetary policy and fiscal policy impact aggregate demand and, therefore, both have implications on CAD.
The CAD has widened primarily due to worsening of trade deficit. “In a slowing economic growth, high trade deficit is a matter of concern and shows some imbalance. So partly, this could be that a lot of domestic production is getting substituted by imports,” said Deepak Mohanty, executive director, RBI.
Liquidity scenario is tight and as on Wednesday, banks borrowed Rs 1,04,340 crore under RBI’s Liquidity Adjustment Facility (LAF), up from Rs 91,305 crore on Tuesday. “Given the cost to combat inflation we want to keep LAF in a deficit mode, but we do not want to keep it in such extreme tightness that monetary transmission does not take place. As long as we are in the anti-inflationary stance, it will be in the deficit mode, but between the +/- 1 per cent of net demand and time liabilities,” said Subbarao.
According to Mohanty, even if the government draws down the entire cash balance, the liquidity deficit will not turn into surplus.
RBI has several instruments for management of liquidity such as cash reserve ratio (CRR), open market operation (OMO) purchase of gilts. “What instrument we use depends upon our assessment of the liquidity situation going forward,” said Subbarao.
RBI on Tuesday lowered the baseline wholesale price index (WPI) inflation projection for March to 6.8 per cent from 7.5 per cent earlier. “The current level of WPI is above RBI’s comfort level and therefore we need to bring it down further. We are looking more at consumer price index... and we have become more sensitive to that after analysts have told us that we must look at all indicators more,” said Subbarao.