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RBI Announces a Mini Budget – Gives Boosts to MSME, Auto and Housing

Reserve Bank of India

The Indian economy is clocking all around growth, reaching the highest levels recorded in the past seven to eight years. Services is at a seven-year high, and manufacturing is at an eight-year high. Moreover, the GST collection for January 2020 is ₹1,10,828 crore, the third straight month where it has crossed the ₹1,00,000 crore mark. Further, Budget 2020 was announced by the Narendra Modi government had made several announcements to pull the economy out of the cyclical slowdown.

In a further boost to the economy, the Reserve Bank of India (RBI) has come out to support the economic recovery by announcing a slew of beneficial measures. In its Statement on Developmental and Regulatory Policies, the RBI has listed out comprehensive steps to shore up the economy to sustain the economic recovery. Being touted as the Mini Budget, the RBI has maintained an accommodative stance in its last policy statement for the current financial year while delineating steps to benefit MSMEs, auto sector and housing sector among others. Markets have already responded very positively to the announcements, trading in green through the day.

Here are the important measures announced:

A. Revised Liquidity Management Framework

RBI has finetuned the existing liquidity management framework. The key elements of the revised framework have been detailed out to simplify it and to outline measures to clearly communicate the objectives and the toolkit for liquidity management.

B. Long Term Repo Operations (LTROs) for Improving Monetary Transmission

From the fortnight beginning on February 15, 2020, RBI shall conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of ₹1,00,000 crore at the policy repo rate.

C. Incentivising Bank Credit to Specific Sectors

Scheduled commercial banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans for automobiles, residential housing and loans to micro, small and medium enterprises (MSMEs), over and above the outstanding level of credit to these segments as at the end of the fortnight ended January 31, 2020 from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR). This exemption will be available for incremental credit extended up to the fortnight ending July 31, 2020.

D. External Benchmarking of New Floating Rate Loans by Banks to Medium Enterprises

To further strengthen monetary transmission, RBI has decided to link pricing of loans by scheduled commercial banks for the medium enterprises also to an external benchmark effective April 1, 2020. Detailed guidelines to this effect will be issued separately.

E. Extension of One-time Restructuring Scheme for MSME advances

RBI will extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020. The restructuring under the scheme has to be implemented latest by December 31, 2020. This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated January 1, 2019 as also the MSME entities which have become stressed thereafter. It is re-emphasised that this is a one-time regulatory dispensation.

F. Guidelines on Projects under Implementation in Commercial Real Estate sector

RBI has decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector.

G. Regional Rural Banks – Permission for Merchant Acquiring Business

To boost digital banking and enabling regional rural banks (RRBs) to provide cost effective and user-friendly solutions to customers, RBI has allowed RRBs, like other commercial banks, to act as merchant acquiring banks, using Aadhaar Pay – BHIM app and POS terminals.

H. Deepening of Rupee Interest Rate Derivative Market

RBI has proposed that all rupee IRD transactions of market makers and their related entities globally, shall be accounted for in India. This measure would encourage higher non-resident participation, enhance the role of domestic market makers in the offshore market, improve transparency, and achieve better regulatory oversight. The revised draft directions shall be issued by end-March 2020.

I. Margin Requirements for Non-Centrally Cleared Derivatives

RBI will issue directions regarding exchange of variation margin (VM) for non-centrally cleared derivatives (NCCDs) by end-March 2020. Draft directions on exchange of initial margin (IM) for NCCDs will be issued by end-June 2020.

J. Inter-operability of Depositories

Continuing with efforts to facilitate interoperability of Government securities depositories, RBI will modify its Government securities registry (the PDO-NDS system) to include constituent details in the Constituent Subsidiary General Ledger (CSGL) accounts. This is expected to fuel interest of retail investors to invest in Government securities. The upgrade is expected to be made operational by end of July 2020.

K. Framework to Establish Self-Regulatory Organisation (SRO) for Digital Payment System

RBI will bring in a framework for establishing an SRO for the digital payment system by April 2020 to foster best practices on security, customer protection and pricing, among others.

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