NEW DELHI: Fears of an inflationary spiral overcame recessionary fears as the Monetary Policy Committee Thursday voted in favour of keeping key interest rates unchanged. The Reserve Bank, however, decided to go in for a regulatory forbearance by allowing a one-time restructuring of loans and extension of debt tenures by up to two years.
RBI's move on debt restructuring came amidst fears of a pile up of bad loans as firms hit by a shrinking economy faced an explosion of defaults and insolvencies after the end of a six-month moratorium till August-end, announced earlier to mitigate risks posed by Covid.
"Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold," Governor Shaktikanta Das said.
The Consumer Price Index (CPI) grew 6.09 per cent in the month of June, way above the RBI's target of 2-4 per cent. The RBI expressed fears of supply chain disruptions on account of fresh lockdowns because of Covid with "implications for both food and non-food prices."
"High inflation is a tax on the people and has to be targeted. Besides, we have to realise that the RBI released a lot of liquidity into the system," said NR Bhanumurthy, Vice Chancellor of Bengaluru's Dr BR Ambedkar School of Economics.
Aditi Nayar, Principal Economist, ICRA Ltd, said, "Its (RBI's) statement revealed a marked uneasiness on the drivers of inflation, despite its expectation that inflation will soften in the second half of the year.”
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The MPC, however, unanimously decided to continue to keep its accommodative policy stance "as long as necessary to revive growth", implying that it may go in for rate cuts in the future. However, the biggest takeaway on Thursday remained RBI allowing the one-time restructuring of loans amid the ongoing Covid crisis.
Debt Restructuring
The RBI's debt resolution plan will allow corporates, MSMEs and individuals to restructure their loans which may have fallen into the non-performing category due to the economic uncertainties resulting from Covid.
"It has been decided to provide a window under the June 7th Prudential Framework to enable lenders to implement a resolution plan in respect of eligible corporate exposures - without change in ownership - as well as personal loans, while classifying such exposures as standard assets, subject to specified conditions," Governor Das said in his statement.
The RBI governor added that in addition to the provision for the restructuring of large corporate loans, stressed MSME borrowers and individuals will also be allowed to restructure their debt provided they were classified as standard on March 31, 2020.
The resolution plan will have to be invoked anytime by December-end and implemented within 180 days of invocation. In case of personal loans a 90-day time limit has been given.
RBI said that accounts which were in default for not more than 30 days as on March 31,2020, will be eligible for such restructuring. Remaining stressed accounts will have to follow June 2019 framework for resolution.
An expert committee headed by KV Kamath will be set up make recommendations to the RBI on the required financial parameters, along with the sector-specific benchmarks to be factored into each resolution plans.
To help out individuals and small firms keen on taking gold loans, the RBI also decided that the loan can go up to 90 per cent of the value of the pledged gold instead of the current 75 per cent.
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